Credit markets are a part of the fixed income market that most investors, professional ones too, have never fully understood. Barry Allan, CEO, CIO at DMAT Capital has been investing in credit and bond markets for much of his 38-year career. His firm is now sub-advisor to Horizons ETFs.
"You either love it or hate it," says Allan. "And it's because, if you look at the high yield market, the long-term return on high yield is 7%. And the yield, the long-term average yield on high yield is somewhere between 6.9 and 7.1%. So capital gains or losses are almost zero. They are less than 1% of the return and yield is 99% of the return," explains Allan. "I think we're going to the point where yield is going to be 50 or 60% of the return and capital gains are going to be 40 to 50% of the returns, uh, in doing that, which by definition means there's going to be more volatility in the marketplace."
In this sixth segment Barry Allan explains what makes credit markets behave the way they do, and that algorithms and AI are rapidly becoming part of investing in the not just in credit, but in the wider fixed income complex, and for good reason.
In a nutshell, Allan has been saying for some time, that the fixed income complex is no longer a place where you can invest passively, or in a buy-and-hold fashion. "That game is over," says Allan.
In terms of strategy, he explains using longer duration government bonds during this period, when the economy is teetering or threatened, and some short duration investment grade bonds for some yield while you're waiting. When equity markets and or the economy take a turn (Allan's outlook expects two 20%+ equity market drawdowns over the next 18 months), long term yields will fall, translating into a component of capital gain, and credit spreads will widen. At that point, he intends to capture capital gains from the long duration government bonds and rotate into high-quality high yield names to exploit lower or gapped-out corporate bond prices.
"People are going to have to get smarter about their credit analysis and that's where algorithms and artificial intelligence are going to are going to come into it," says Allan.
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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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Barry Allan is the President, CEO and CIO of DMAT and has more than 38 years of industry experience running investment mandates across the full spectrum of the fixed income world, including Government bonds, investment-grade bonds, high-yield bonds and distressed bonds. Prior to founding DMAT, Mr. Allan founded Marret Asset Management in 2001, and built it into a full-service asset management firm, which when he left in 2019, had assets under management of more than $4.4 billion. Mr. Allan has also held senior positions with Altamira Management Ltd., where he managed a wide range of global fixed income mandates, and Nesbitt Burns, where he was a proprietary trader, Director, and head of fixed income derivatives.
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