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.”
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.