There is no substitute for experience. After 38 years of successfully investing in fixed income and credit, you learn where the pitfalls are, and you know not only how to avoid them, but how to exploit them. Barry Allan, CEO, CIO, DMAT Capital Management Inc. launched his new firm in 2019, so that he could start on a new footing, after leaving Marret Asset Management. His former firm had become large, and more bureaucratic, and starting a new firm would enable him and his team to take a more tactical, more flexible and focused approach to navigating the bond and credit markets and the yield curve, that stand a better chance of generating more meaningful returns than current interest rates suggest are possible.
In this seventh segment, Allan talks about what he's doing, what he's not doing, and how he manages risk in fixed income and credit.
"In 38 years of doing this, I’ve never seen the worst risk reward in the credit markets than we’re in now. 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," says Allan. "You could be bearish and invest in cash alternatives and earn 1%, or you can adjust to take the yields that you think is safe and then maybe invest in things that are a little more riskier, offset by short positions in high yield indices, which allow you to capture a higher yield without taking that on that additional volatility."
"That’s really what our strategy is, but you have to realize that… We’re not going back. Interest rates are not going up other than small cyclical upticks like we maybe observed in the last couple of months, and we may see in the next six months or so, but my long term view on inflation is that it’s falling much more rapidly," says Allan. "Whatever small uptick in inflation we have in the short term is simply due to a decline in the US dollar and the US dollar can’t really decline for multi-years in my view, because if that happens, the rest of the world’s currencies have to go up and if their currencies go up, then that hurts their economic growth. Then it starts to affect US economic growth."
"You have to realize that high yield is probably the only asset class, fixed income asset class that’s going to get you more than a 2% yield going forward. It’s just how you manage it, and whether you do it tactically, and whether you have the ability, and the propensity, and the mandate to invest in it on a long, short basis," says Allan. "Long, short doesn’t mean leveraged. It simply means that you could deploy leverage without taking on incremental risk, because you’ve got short positions that are dampening the volatility to begin with. Bottom line is, you can’t really invest for yield anymore where you can, is in high yield, but it’s about half the yield that you could previously."
"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."
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.
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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