The power of a global multi-sector bond solution in today’s markets

With so much uncertainty in financial markets at present, investors are seeking solutions that can deliver consistent and attractive levels of income while mitigating risks. We believe these attributes can be found in an actively managed, global multi-sector bond approach, which is broad, flexible, and offers potential diversification benefits. In this second article of our series, we are delving into what this bond approach is and the potential advantages of an allocation for investors.

What is a global multi-sector approach, and where can it invest?

A global multi sector bond approach is an actively managed flexible bond strategy that seeks to generate income and manage risks by diversifying investments across the full fixed income opportunity set. It has the ability to invest across a wide variety of sectors, including government, corporate, and securitized debt from both investment grade and high yield issuers across developed and emerging markets. The investment universe is vast with each offering unique characteristics. For instance, government bonds are generally considered high quality, so liquidity is good in this space. Investment-grade corporate bonds, meanwhile, can benefit from both duration and credit spread components. High yield and emerging market corporate bonds, on the other hand, present potential opportunities for capital gains due to their higher yields, but they come with greater credit risk.

Even within each segment, there is significant variety. Take the securitized debt space, for example. Subsectors such as asset-backed securities, which are backed largely by consumer credit, including credit cards, student loans, and auto loans, typically have shorter duration profiles. This characteristic makes them less sensitive to interest rate changes than commercial mortgage backed securities, which are backed by loans on assets such as shopping malls and office buildings. As a result, their duration profile tends to be longer.

As each segment within the asset class is unique and driven by different factors, there’s often a wide dispersion among sector returns in fixed income. At different times, different sectors may be in or out of favor, and with a multi-sector approach, there’s potential to take advantage of these trends.

Why consider a global bond multi-sector bond approach?

(Fig. 1) A broad opportunity set opens up potential income and diversification opportunities

For illustrative purposes only. This is not to be construed to be investment advice or a recommendation to take any particular investment action. Investments involve risks, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.
Source: T. Rowe Price.

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Benefits of a global multi-sector bond approach

There are several key benefits to a multi-sector bond allocation, in our view. First, diversification potential—the ability to invest across a range of different sectors offers the potential to spread out investments and be less exposed to a single market/sector or economic event. This should not only help manage risks and smooth out volatility but also provides the potential to take advantage of different regional and country economic cycles and interest rate environments. Second, the potential to generate an attractive and consistent income stream by looking across the full fixed income universe for opportunities. Third, flexibility—the ability to make tactical changes and adapt to different market environments—could help manage risks and also open up opportunities to take advantage of market dislocations.

"At different times, different sectors may be in or out of favor, and with a multi-sector approach, there’s potential to take advantage of these trends."
Ken Orchard, Head of International Fixed Income

Overall, a multi-sector’s broad opportunity set and ability to tactically adjust sector allocations to the market environment may appeal to an investor who is uncertain about what sector to buy or when to make a reallocation decision. The flexibility of this bond approach takes that burden away and can be seen as a “one stop shop” for a fixed income allocation. We believe it is a good option for all types of investors to consider, particularly those seeking both consistent income and potential diversification. But it’s important to choose a multi-sector approach that is truly global in nature and not tilted toward specific sectors that can lead to concentration risks. Actively managing duration, sector allocation, and security selection is also important, especially in the current market environment where global macro uncertainty and high fiscal deficits are likely to lead to greater dispersion and volatility in bond markets.