Robert Gray Robert Gray

Advisors, clients and other market-watchers focused a lot on the strong performance of equities in 2017. But thanks especially to its off-benchmark exposure to high-yield bonds, Boston-based GW&K Investment Management’s Enhanced Core Bond Strategy performed “exceptionally well” last year, according to Envestnet | PMC fixed-income analyst Mike Wedekind.

At the same time, the leaders of this GW&K fixed-income portfolio diligently have been watching risk. For the past 18 months, the taxable fixed-income team has moved to reduce spread duration and taken “a measured approach to the significant agency mortgage-backed securities (or MBS) portion of the portfolio by focusing on non-current coupons,” Wedekind explains.

How did GW&K come to operate as an award-winning fixed-income shop? According to Partner Robert Gray, head of national accounts, it started out as an advisor to high-net-worth clients in the Boston area in the early 1970s. After growing its client base for the next 10-15 years, it moved into third-party business “when firms started to send their fixed income clients to us to manage,” Gray says.

“That’s really when [GW&K] took off. We had a particular expertise and still do today in the municipal bond side [of the business],” he explained. “But our taxable department was really founded in the late ‘80s, and this strategy which we won the award for was really a derivative of our first taxable strategy, which came into being in 1988.”

The group’s taxable department now manages about $4 billion in assets. “We’ve seen good growth, and that’s really a reflection of our active management approach and our ability to be flexible within the space that we occupy.”

In terms of high-yield holdings, GW&K zooms in on those of “the highest quality … so really you’re talking about single- and double-Bs,” according to Gray. “Most of our investments are in the separate-account format where the clients own the underlying securities. And we’ve had great success in just focusing on single- [and] double-Bs just below the investment-grade space, and we’ve been doing it for a long time.”

How does the firm feel about rising rates? “As a fixed-income shop, it may sound odd but we really go to bed every night hoping that rates will rise. The last thing we really want is to become Japan, where interest rates really collapsed. We believe in a rising-rate environment that allows us to be active and really do what we do well,” he explained.

Many retail investors tend to sell their bonds or shorten the duration of the portfolio when rates rise, he points out. But GW&K does the reverse, “because that’s really when you want to lock in higher rates. We use the analogy that it’s sort-of like eighth-grade math — rate times time equals distance,” Gray said.

With rising interest rates, the group aims to “lock in higher rates for a longer period of time or longer duration,” he explained, “to extend our duration and — depending on where we are in the cycle, we will potentially overweight the high yield sector or underweight it.”

Most recently, the firm has “lightened up … a little bit on the high yield side,” but it believes with these holdings “you’re going to do better than just being in Treasuries” over a full market cycle.

Also, the Enhanced Core Bond Strategy (unlike some passive or laddered strategies) can incorporate winners in the taxable market, according to Gray. “We utilize all five sectors of the fixed-income market … and will overweight and underweight those areas depending on what portfolio manager Mary Kane thinks” is most attractive in terms of relative value.

As for the credit quality of its high-yield holdings, the portfolio has moved that up a tad. “Right now, the spread between BB to BBB and BBB to A is really as tight as it’s been since the financial crisis in 2008,” he said. “At some point, we will probably look to take advantage of spread widening, when and if that happens.”

Robbie Cannon Robbie Cannon

Horizon Investments won both the Overall Asset Manager of the Year and the Strategist Award thanks to its forward-thinking approach, Envestnet | PMC analyst Brooks Friederich says: “The firm was first to market in offering goals-based investing within a strategist solution and has long been a strong advocate for educating and changing the way the industry approaches the topic.”

The strategy’s returns last year ranged from 7.34-22.22% for the growth stage, 16.13-22.17% for the protection stage, and 11.97-14.76% for the spending stage.

“Our approach is centered around the individual,” said Horizon Investments President and CEO Robbie Cannon. “For so long, the industry has been worried about exposures, style boxes — large cap and small cap, etc.” The solutions created by Horizon, he explains, “actually meet the needs of the clients.”

The goals-based strategy aims to cover a client’s entire investment journey, meaning financial accumulation, preservation and distribution. Plus, it recognizes that clients’ needs and objectives differ in each of the three phases, according to Cannon.

“In retirement income … the question the client is asking is, ‘What’s the maximum I can spend for the longest period of time?’ That’s a very different question than asking, ‘Should I be invested in international [holdings] or domestics?’ That’s really a longevity question,” he said, and the solution has to be structured accordingly.

What makes goals-based investing special, he says, is how it differs from “old school” or traditional investing: “It’s not IBM you’re investing in or Microsoft; it’s an outcome,” Cannon stated.

Horizon’s goals-based portfolios are available with both ETFs and with a combination of ETFs and proprietary mutual funds. “But they’re structured … to achieve something that the client is actually asking for. They’re not asking for exposure — they’re asking for a destination,” he said.

In the distribution stage, for instance, the product is structured using a longevity perspective, when investors “need some sort of engine to drive growth,” according to Cannon. “But you also need some sort of preservation mechanism or risk-management mechanism. And you have to focus on how you are going to drive income into the future.”

Horizon’s strategy combines these objectives and the corresponding investments. “From a product standpoint, very simply, you have a portfolio, you have some short spend reserve, and you have a risk-mitigation technique on top of the portfolio. What you’re trying to solve for is longevity, inflation, sequence risk and catastrophic risk all within the same packaging,” the CEO explained.

While investments in general are “complicated,” Cannon says, the firm’s approach is meant to be simple for investors. “For example, our distribution solution is called Real Spend — an after-inflation-adjustment spend rate that they can see … 20 and 30 years [out]. It’s something that the client … can get really comfortable with.”

This and other aspects of the goals-based solutions offered by the firm earn it further praise from Envestnet | PMC’s Friederich. “Horizon’s goals-based solutions are highly differentiated and innovative, namely the use of its patented Risk Assist overlay for its protect strategies, and the concept of a spending reserve to increase the probability of meeting distribution needs for its spend strategies,” he explained.

As part of its distribution solution, Horizon calculates a personal inflation rate, according the Cannon. This tool adjusts for investors who expect to have higher medical costs, for instance.

“The future is heading to goals-based investment management, specifically outcomes and the whole idea of financial wellness for the individual,” he said. The different elements of this approach are all “wrapped around better outcomes, because our businesses in financial services are centered around the individual client.”

Many advisors have used technology for product research, and they’ve relied on cash flow analysis and financial planning, the Cannon explains. “What was needed is this idea of connecting product to planning,” he said. “I really believe that’s goals-based investment management, as they play the middle ground between the product side and the planning side.”