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“Isn’t value investing more of an equity market concept?”

The short answer is no. While it’s a legitimate question (and one we’ve gotten quite accustomed to hearing), the reality is that both equity and fixed income market participants are often drawn to “cheap” assets by the allure of enhanced excess return potential. Here is some of my team’s latest thinking on value investing and why we think it’s relevant in credit markets.

What exactly is “value” investing in credit markets anyway?

For years, many fixed income investors have adhered to pretty loose definitions of what constitutes an overvalued (“expensive”) or undervalued (“cheap”) credit asset, typically based on whether its option-adjusted-spread is wide or tight versus a given risk-free asset (e.g., US Treasuries).

Our investment framework goes a step further with a more nuanced approach to the notion of “value” in corporate credit markets. We follow a…

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Brendan Fludder
CFA
Research Manager
Boston
Carlos Coutinho
Carlos Coutinho
CFA
Solutions Portfolio Manager
Boston
Noah Comen
Noah Comen
CFA
Investment Strategy Analyst
Boston

The widespread economic fallout from the COVID-19 crisis dealt a formidable challenge to many municipal bond issuers’ ability to maintain and improve their credit quality. Given the need for state-level lockdowns and the subsequent realization that a return to pre-pandemic activity would take much longer than anticipated, the outlook as of mid-2020 pointed to an extremely trying period for the municipal bond market.

However, a combination of factors came together over the course of the year that led to more benign conditions than initially feared and set the stage for many better-than-expected credit outcomes. While some municipal credits have been downgraded since the pandemic began, most have…

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Conor McEachern
Conor McEachern
Fixed Income Credit Analyst
Boston

Broadly speaking, as of this writing, we believe municipal bond (muni) valuations may offer an attractive entry point for discerning investors. As of December 2020, municipal credit spreads had yet to make up for ground lost to the COVID-19 sell-off earlier in the year (Figure 1). Lower expected 2021 tax-exempt supply and strong retail demand suggest there is room for further spread tightening.

Having said that, challenges remain. Fundamentals in some areas of the muni market continue to be tested by the COVID-induced economic slowdown. Accordingly, deep credit research remains critical in this space. Let’s take a closer look on a sector-by-sector basis.

Figure 1

BBB muni spreads have tightened but remain elevated

1. Not-for-profit health care: Jenn Soule (Sector Analyst)

2020: Lessons learned

  • Market tends to overcompensate after…
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Timothy Haney
Tim Haney
CFA
Fixed Income Portfolio Manager
Boston
Brad Libby
Brad Libby
Fixed Income Credit Analyst
Boston

Near term, our view on the high-yield market remains that a neutral-to-slightly cautious risk posture, with a heavy focus on security selection, is warranted amid spiking COVID numbers, the US political transition, the waning effects of government stimulus, and credit spreads having tightened from earlier this year. Longer term, however, our outlook is more positive as we see plenty of reasons to be optimistic as we look out nine to 12 months from now.

Macro: Strong medium-to-longer term

  • We anticipate a difficult short term marked by increased credit stress over the next couple of months, along with a possible reacceleration in high-yield defaults, followed by a much more supportive medium-to-longer term.
  • We expect the global economic backdrop to rebound strongly in 2021 and into 2022, particularly as COVID vaccines become reality and if governments deliver additional stimulus.
  • European economies could begin to show improvement as early as the first quarter of 2021, while the US economy is likely to strengthen in earnest starting in the second half of the year.
  • One big question for high-yield investors right now is: Will the market engage with the near-term downside risks or look through to…
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Christopher Jones
CFA
Fixed Income Portfolio Manager
Boston
Michael Hong headshot
Michael Hong
CFA
Fixed Income Portfolio Manager
Boston
Konstantin Leidman headshot
Konstantin Leidman
CFA
Fixed Income Portfolio Manager
London

Remarkable, painful, unsettling, hopeful… 2020 brought a roller-coaster ride of emotions, not to mention its share of economic and market volatility. So, with the US elections pretty much behind us, further US fiscal stimulus on hold (for now), and COVID cases spiking in the US and Europe (but with progress toward a vaccine), what’s our investment thesis for 2021?

Over our 12-month horizon, the promise of more good news on the vaccine front, along with gradually reopening economies and strong government policy support, make us more confident that we’ll begin to see the global economy recover from still-depressed levels. We believe the improving economic backdrop and the prospect of a safe, effective vaccine should be catalysts for a turning point in the market narrative — a broad, durable rotation from growth assets into their value counterparts. This could well be an enduring theme going forward.

Global equities: Leaning toward value

We expect a range of value-type equity exposures to outperform in 2021, including overseas developed markets (Europe and Japan versus the US), emerging markets, smaller-cap stocks, and cyclical sectors (such as financials) versus growth sectors. In addition to financials, sectors we find attractive include…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston
Daniel Cook headshot
Daniel Cook
CFA
Investment Strategy Analyst
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