Fixed Income Perspectives | Mackenzie Investments

Manager Videos

Fixed Income Perspectives

Steve Locke advocates an active and flexible approach

Steve Locke, who heads the Mackenzie Fixed Income Team, takes an active and flexible approach to fixed income in today’s low-yield environment.

In this video, Locke explains how his team is positioning Mackenzie Strategic Bond Fund and Mackenzie Floating Rate Income Fund to benefit from stable interest rates, which he sees continuing through 2014, while carefully managing portfolio risk.

Fixed Income Perspectives

Steve Locke advocates an active and flexible approach

Show transcript

STEVE LOCKE: What we're dealing with those fixed-income investors today is a very low policy rate environment and a low yield environment. So we think as we look at the market this year, we're very likely to see a coupon-like return, which means the yields that we're starting the year at are very likely to be the total returns from many fixed-income asset classes this year, whether it be government bonds, investment-grade corporate debt, high-yield debt, or floating rate loans.

So that's the expectation that we have as we come into the year and as we go through this quarter. And nothing that's happening in the data front is really changing our opinion of that. There are going to be pockets of volatility though for fixed-income investors. We're starting to see that outside of Canada in certain emerging market debt economies, for example. But on the Canadian side, we certainly see a lot of stability that continues and we will expect to earn those coupons this year.

So I don't expect to see the Bank of Canada ease rates this year. We have had a very stable policy rate from the Bank of Canada over the last couple of years. It's still at a fairly low level.

But when we think about the Canadian economy this year, although it will have a bit of a slower growth profile compared to the US, what we are seeing is the Bank is allowing the Canadian dollar to weaken here against the US dollar. It's already happening in international currency markets, and I think the Bank is OK with that because that acts as stimulus for export sector. Rates are likely to stay where they are because they have impacts on the Canadian economy, especially through lending and the mortgage curve. And given that housing has gone up so much in price for the last few years for Canadians, I think the Bank will be content to leave rates where they are and not reduce them to stimulate housing further.

So the decline we've seen in the Canadian dollar over the past 12 months is indirectly and somewhat directly related to what we're seeing in emerging markets. Emerging markets have been a chief source of global growth for the last few years. And of course, as a result of that growth they've been demanding commodities from countries, like Canada, who produce them. So that benefited us for a number of years.

But as we've gone into a slower growth profile for emerging market economies over the past year or two, obviously, that's had an impact on commodity prices. And as a result, there's a spillover impact on the value of the Canadian dollar and the prospects for Canada's growth rate overall. So we've had a weaker dollar that's resulted from that.

Well, how it works out with the emerging market currencies with the volatility we've seen there and their government bond curves and the volatility we've seen on those curves in the last 6 to 12 months, that's ultimately going to be an interesting test for the global economy, I think, this year. I think in the near term we are going to see volatility. We have seen reactionary policy now early in the year by some of the central banks in these EM countries to try to react to protect their currency in some cases and in other cases to allow the currency to depreciate a little bit so as to not debase their standard of living in the economy with a rapid movement.

So they're looking at controlling policy rates, but yet also trying to control the currency. And this is going to be a difficult challenge for many countries, especially those who have an external funding deficit where they have to go to foreign jurisdictions to borrow, and ultimately then if they end up devaluing their currency, those foreign borrowings become more expensive to repay.

None of the markets globally are separated from each other. So when we have an impact on one market like emerging market debt or on emerging market currencies, there tends to be some indirect effects on other markets over time when they reprice against each other. So we look at this as an active manager as potentially an opportunity. When we see a market destabilize and it becomes cheaper for us to invest in, we can make a tradeoff. And then our funds that are flexible-- like strategic bond, floating rate income, strategic income fund-- we can make these choices and these tradeoffs.

And in fact, we have been looking at them. Since the summer of 2013 when we did see some destabilizing currencies and yield curves from some of the emerging market nations, we started to look at potential opportunities in some of those. Some of them we felt it was too early, and we've seen a little bit more destabilization since then. So as a result, we're going to be looking at them again here early in 2014 for some investment opportunity down the road.

We came into 2014 positioning the strategic bond fund and floating rate income fund a little bit less than fully invested. In fact, maybe only 3/4 invested in those riskier asset classes, those higher yielding asset classes, like high-yield bonds and floating rate loans. And the reason we did that is that we were not finding the best relative value across the space all the time. We're looking for the best relative value in those investments we put in the portfolio. And some of the valuations have changed a lot in the last two years.

But also, we're looking at potentially new opportunities coming from the emerging market debt spaces and other places in markets that cheapen up with the volatility we've seen recently. And over the last 6 to 12 months, we've seen some of that volatility, and we're actively looking at those assets, and we'll use that dry powder in the funds to take advantage of good, cheap yield opportunities going forward.

Well, one of the big benefits of being flexible is that you can attach and then detach different areas of the fixed income market to a portfolio when they're offering value and when they're not offering value. And that's obviously an active approach and a more flexible approach gets you to there versus a more passive approach, which really takes on a certain kind of risk all the time. So this is one of the things that's chiefly changed in our fixed-income environment is that we've had for the last 10, 20, or 30 years an environment that really rewarded a passive approach about taking a certain kind of risk and that was the interest rate risk.

Now, we don't need yields to rise in the near term for us to be thinking about diversifying away from purely interest rate risk in the portfolio. So that's why the addition of other asset classes of thin fixed income, such as floating rate securities, is an important add to a portfolio today. It diversifies you away from that risk that's unlikely to reward you that the same way it did for the last 10 or 20 years.