Barry Allan: Reaching for Yield in the Worst Risk/Reward Period Ever?

Barry Allan has been a portfolio manager in and around the fixed income complex in Canada for 38 years. The conditions in fixed income markets have never been quite like they are today. After leaving Marret Asset Management in 2019, he saw an opportunity to launch his new firm, DMAT Capital Management, which is now sub-advisor to Horizons Active High Yield Bond ETF (HYI), and Horizons Tactical Absolute Return Bond ETF (HARB).

In this fourth segment, Barry Allan shares his thoughts on how to navigate fixed income in the period ahead, and where it appears some investors could be taking far more risk than they realize, in order to get better yields on their fixed income allocations. You can watch the previous three segments here: Part 1 & 2, Part 3

Allan believes that this transitory period we are in requires fixed income investors to be more tactical about how they garner income from fixed income investments.

"Again, I think what you have to do is rotate amongst the fixed income categories, and that is governments, high yield, investment grade, and short duration. You have to be able to rotate to the area of one of those mandates that has the best risk/reward at the time," says Allan. "If you’re successful at that, you can produce returns that are materially higher than the one and a half or 2%, the fixed income benchmarks are going to produce with not a lot of incremental risk."

One of the potential pitfalls facing investors, in particular the pre- and post-retired demographic, which represent the largest share of investment assets now, is that they are at risk of reaching for yields in some fixed income vehicles whose strategies may not be sustainable, like the debt of distressed companies, or in some highly leveraged investment grade fixed income strategies.

"I’ve never seen a worse risk/reward in the credit markets than we’re in now," says Barry Allan. "You have the highest leverage, highest default risk, and you have the lowest credit spreads that I’ve seen all the way through that timeframe, but that’s the fact of life.

"Yeah, this is what I spent at least a couple of years thinking about as to what’s going to happen when governments yield zero and investment grade yields one and a quarter, one and a half and high yields at three and a half or four. If you want returns higher than that without going directly to distressed, where you have very high levels of default risk, how are you going to do that?, asks Allan. "The industry tends to want you to have single mandate funds. When you really think about that, there’s by definition, if you have a single mandate, there’s always going to be periods where it’s going to be in favor and there’s going to be periods where it’s not going to do well. It’s going to be out of favor. That argues against
single mandate, even though the industry is primarily built around that."

Horizons Active High Yield Bond ETF (HYI), is now sub-advised by DMAT Capital Management Inc. DMAT assumed sub-advisory responsibility of HYI as of November 4, 2020.

Horizons Tactical Absolute Return Bond ETF (HARB) is a new ETF, sub-advised by DMAT Capital Management Inc. It will provide an actively managed fixed income strategy with the flexibility to “go anywhere” for tactical investment opportunities, which could be more important now than ever before.

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