#WellSaid

The Wellington Blog — A diverse marketplace of ideas, where our investment professionals share and challenge each other’s views. They decide independently how to draw on those ideas to sharpen their investment decisions, unconstrained by any single “house view.”

With a sustained rise in interest rates in the coming months a distinct possibility as of this writing, we thought now would be an opportune time to take a close look at some potential impacts of higher rates on clients’ fixed income portfolios. To do so, we compared the hypothetical five-year performance of the Bloomberg US Aggregate Bond Index under three different illustrative scenarios that could play out going forward: 1) rates remain unchanged; 2) rates rise abruptly; and 3) rates rise gradually (i.e., over three years).

Key takeaways for fixed income investors

A few of our main takeaways from this analysis were as follows:

  • While abrupt rises in rates might lead to short-term drawdowns in fixed income portfolios, they can at times be desirable for longer-term investors, given opportunities to…

Congress has effectively “kicked the can down the road” by raising the statutory debt limit sufficiently to meet Treasury obligations until December 3. This is by no means a solution to the problem, but rather just delays the inevitable uncertainty related to the debt “ceiling” drama that is likely to build as December approaches.

US Treasury bills (T-bills) are continuing to react to the ongoing uncertainty. Notably, we have observed a noticeable “cheapening” of T-bills scheduled to mature in December, creating a “hump” in the T-bill yield curve that moderates in late December and into January (Figure 1). In our view, this turn of events does not present an opportunity for bond investors to reach for incremental yield, as we believe they should instead be focused on preserving liquidity through their T-bill allocation.

Treasury market jitters

In anticipation of the possibility of a technical debt default by the US government, T-bills with maturities falling shortly after the new December 3 deadline to raise the debt limit are commanding a…

MARKETS
Balaji Venkataraman
Balaji Venkataraman
Investment Specialist
Timothy Smith
Tim Smith
Fixed Income Portfolio Manager

In the wake of the latest growth stock sell-off, I’ve been reviewing my equity opportunity sets across the market sectors and subsectors that I cover, including digital advertising, e-commerce, and video games. For now, I’d like to focus specifically on that latter segment of the market. The upshot: In general, I remain positive on the future of gaming and find a number of the stocks to be potentially attractive investment plays as of this writing.

Many of these stocks outperformed amid the height of COVID-19 and the widespread physical lockdowns triggered by it — to no one’s huge surprise really, because many people were more or less “stuck” at home for months on end, with ample time (and desire) to indulge in leisure activities like gaming that they might not be able to partake of under more “normal” societal conditions. But, and again not that surprisingly, many of the same stocks have underperformed this year as much of the world (thankfully) has begun to shed or loosen the pandemic-induced shelter-in-place orders, business closures, travel restrictions, and so on.

Why I’m bullish on video game stocks

Interestingly, however, my research and anecdotal evidence suggest that the amount of time global consumers have actually spent on gaming entertainment…

THEMES
Brian Barbetta
Brian Barbetta
Global Industry Analyst
Boston

The challenges of the past 18 months or so have highlighted the potential for environmental, social, and governance (ESG) factors to become even more relevant to asset management and have underscored the ever-increasing importance of stewardship by fiduciaries and active investors alike. ESG has quickly become one of the defining investment criteria of this decade — a trend we have little doubt will endure in 2022 and beyond.

We have long believed that mounting sovereign debt burdens pose a risk to investors, even in developed markets. At the very least, investors are not being adequately compensated for investing in the most heavily indebted countries. Given the sharp rise in government debt levels in response to the global COVID-19 crisis, it’s an opportune time for sovereign bond investors to refresh their investment frameworks, the particular metrics to be applied, and their country selection methodologies, including the ESG factors underlying investment…

MARKETS
SUSTAINABILITY
Marion Pelata
Marion Pelata
Fixed Income Portfolio Manager
London
Martin Harvey
CFA, CFTC
Fixed Income Portfolio Manager
London
Jitu Naidu
Investment Communications Manager
Boston

I spent 10 days in Brazil in August 2021, visiting technology, retail, real estate, and health care companies in search of stocks to add to my potential “buy” list. I met with 22 corporate CEOs, 21 of whom told me I was the first foreign investor they’d seen in person since pre-COVID. Many of them chatted with me for over an hour — a vivid illustration of how there is just no substitute for being on the ground in emerging markets (EMs), especially at a time like this.

I departed with some valuable insights into a number of companies that led me to better appreciate the robustness of their business models. Indeed, there are plenty of stock- and industry-specific investment opportunities in Brazil, which I’ll explore in a future blog post. But at the broad country level, I left with a decidedly more negative take. The analogy that came to mind was that of Brazil being in a “straitjacket,” with all the unpleasant…

MACRO
THEMES
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

In many cases, investing in an alternative (hedge fund) strategy requires a totally different mindset and starting point than traditional, long-only investing. Yet we often find that the “lines get blurred,” so to speak, when talking with clients about our alternative investment capabilities and the numerous opportunities that may be available to them in this dynamic space. Let’s take a closer look.

Long-only investing vs long/short investing strategies

Typically, the process that traditional long-only investors follow when making an investment decision is to first conduct research (or have others do so) to identify an existing market opportunity and to then determine the best means of deploying the capital needed to exploit that opportunity, which most commonly takes the form of an equity or fixed income strategy. This concept of “idea generation and pursuit” has spawned…

Japanese stocks have been decidedly out of favor with most investors for several years now, underperforming most recently in response to the 2020 COVID-19 crisis and Japan’s delayed economic recovery from it this year. (For more on that and related equity opportunities in Japan these days, please see Revisiting Japan from a contrarian perspective, co-authored by my colleagues, Jun Oh and Takuma Kamimura.)

Meanwhile, on a more upbeat note, the trend toward Japanese corporate governance reform is steadily proceeding apace. With Japan’s revised Corporate Governance Code calling for further improvements to the functioning of corporate boards of directors, as well as strategies for addressing global climate change, Japanese equity returns to shareholders have in many cases rebounded lately amid stronger business performances. This is an encouraging development that we broadly expect to…

SUSTAINABILITY
THEMES
Katsuhiro Iwai
Katsuhiro Iwai
CFA, CMA
Equity Portfolio Manager
Tokyo
Soda Yuichiro
Yuichiro Soda
CFA, CMA
Equity Research Analyst
Tokyo

Last week, a blog post titled Fixed income investors warily eye Congress and the Fed discussed three likely government policy drivers of fixed income markets in the period ahead — US monetary policy, US fiscal policy, and the US debt ceiling. Here, we’ll take the next step of briefly highlighting some fixed income market sectors where investors might turn for attractive total return opportunities in today’s challenging environment. Indeed, it’s perhaps the most pressing question many fixed income clients have been asking lately.

A supportive US policy backdrop

The prevailing US monetary and fiscal policy backdrop continues to be broadly supportive of credit fundamentals, but many credit sectors are not currently…

MARKETS
Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston
Amar Reganti
Amar Reganti
Investment Director
Boston
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