Fixed income markets have proven disorienting for investors over the past several years, with multiple interest rate hikes, an extended credit cycle and geopolitical tensions creating significant challenges for investors. The current environment presents a different picture: Interest rates are holding steady and the U.S. economy appears stable, although the pace of growth is slowing.

What challenges do today’s markets pose for fixed income investors?

After nine interest rate hikes over the last four years, the Federal Reserve (Fed) hit pause on rate increases early in 2019 in an effort to maintain positive economic momentum. The threat posed by rising interest rates (bond prices fall as rates rise) has subsided for now, but investors may once again find themselves searching for income in a low-yield environment.

With the fear of the Fed raising rates into a slowing economy receding, riskier assets, including corporate credit, started the year off strong. While there are signs that the U.S. economy can remain stable for the next few quarters, investors should be mindful that corporate credit valuations generally reflect this outlook and that the best days of the business cycle are likely behind us.

In this environment, where do you see opportunities for generating yield?

We believe there is some room left to run in the U.S. economy, which means it may be prudent to maintain positions in higher-yielding opportunities in the form of bank loans and high-yield corporate bonds. The key is to focus on those issuers with the potential to generate solid free cash flow and whose management teams see the value in using it to pay down debt. We are watching for attractively valued opportunities both in the new issue market and when market volatility creates price dislocations. We are, however, mindful of the importance of diversification at this late stage of the cycle.

In the Multi-Sector Income Fund, we seek to mitigate the higher volatility of assets that have higher yield potential – known as “plus” sectors – with our lower-volatility, lower-yielding “core” allocation, which includes investment-grade corporate bonds, agency mortgage-backed securities (MBS) and Treasuries. For example, with interest rate volatility likely to be low in the coming months, we are looking to high-quality MBS as ballast positions and sources of income. As we move closer to the end of this business cycle, we expect to shift into a more defensive stance.

What is your approach to risk management?

Because we’re actively scrutinizing issuers and individual securities, we’re always ready to proactively invest in opportunities with the potential to generate higher yields as well as to increase our allocations to higher-quality assets as necessary in an effort to preserve capital.

Our ability to navigate between lower-volatility core sectors and higher-yielding plus sectors is critical as we strive to help investors generate income while weathering changing market environments. By essentially straddling the risk-return profile of a traditional core plus bond portfolio and that of a high-yield portfolio, the fund has the potential to help investors generate less volatile return and income streams.

With inflation hovering around 2%, our income focus gives the fund the potential to help investors outpace inflation as they pursue their investment goals.

What are some advantages of the Multi-Sector Income Fund for income investors?

One of the defining features of the Fund is that it’s a true multi-sector fund – we sought to create a portfolio of our best ideas across all fixed income sectors. Each of the Fund’s three portfolio managers has a distinct area of expertise, allowing us to identify which sectors of the market could offer the strongest potential and which sectors might warrant extra caution. The approach allows us to be nimble in our quest for income and help us to identify attractive opportunities in various market environments.

The research capabilities of our team are another key feature, arming us with critical insights that guide our asset allocation decisions. Fundamental, bottom-up research – in which we analyze and value individual securities – is core to our process, and we depend on the insights of analysts who hear directly from the management teams of the companies we consider investing in.

What type of investor might want to consider this Fund?

Investors who are seeking the potential for consistently high current income – and who are concerned about the volatility typically associated with a traditional high-yield portfolio – should consider this Fund. We incorporate multiple levers to help generate yield and seek to protect against some of the risks that could be detrimental to a client’s portfolio. In pursuit of our objectives of high current income and capital appreciation, our core tenet is simple: we seek to generate sufficient, stable income without taking on substantial risk – even in challenging markets.

Learn more about Janus Henderson Multi-Sector Income Fund

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