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In a diversified portfolio, fixed income can play multiple roles — such as generating cash flow, reducing volatility, providing liquidity, and preserving capital — to help investors meet their priorities. Is the prominence and appeal of fixed income evolving?
To explore the potential, we talked to Ben Chim of TD Asset Management Inc. (TDAM). He leads the High Yield Fixed Income Team and, as a Portfolio Manager, is responsible for active retail and institutional fixed income portfolios.
TDAM has $181 billion in fixed income assets under management as of the end of June 2024.¹ Their lineup includes a suite of indexed, active, liquidity management and target maturity bond ETFs. The firm also has a reputation for extensive independent research, sound yield and credit curve analyses, and strategic portfolio construction.
“The team of portfolio managers and credit research analysts I work with do a lot of due diligence in thinking of risk and opportunities,” says Chim.
Is the role of fixed income changing within a client’s portfolio?
Ben Chim: From 2010 to 2019, government bond yields were extremely low, and U.S. investment-grade corporate bonds had an average yield of just under 3.5 percent, suggesting modest total returns. There wasn’t a lot of motivation for investors to own fixed income. Now, fixed income has the potential for returns to outperform yields if we see a material acceleration of rate cuts.
What sets apart the TDAM approach to fixed income?
BC: Our research process. For every investment — whether high-yield, investment-grade, private debt, or sovereign funds — we do deep dives into all aspects of credit. About forty percent of the time, our investment-grade ratings differ from the rating agencies.
What accounts for that?
BC: Our ability to see how a company will perform over the long term. We develop an independent view of credit for the next five to 10 years. And we have a long track record of managing fixed income. Dedicated fixed income traders ensure we have best-in-class execution.
What does innovation mean in fixed income?
BC: Over the last 15 years, fund manufacturers have developed innovative products to meet diverse investor needs, giving them more choice and opportunities in the marketplace. We launched fixed income solutions, including global income and global high-yield ETFs, and, more recently, target maturity bond ETFs.
Why can ETFs be an attractive way to achieve what fixed income can deliver?
BC: They’re liquid and low-cost investment vehicles. Plus, you can get comprehensive and diversified exposure to a variety of sectors, maturities, and geographies to help you build balanced portfolios.
In the current rate environment and overall market environment, what are the opportunities for fixed income?
BC: In terms of investor need, volatility hasn’t come from credit but from interest rates themselves. That has made higher-quality bonds more attractive as investments. We’ve provided more solutions — like our target maturity bond ETFs, which have maturity years of 2025, 2026, and 2027. Each invests in a portfolio of investment-grade corporate bonds, hand-picked by TDAM’s Fixed Income Team. They seek to generate competitive yields and limit the volatility from interest rates that could come from the supply in the market or geopolitical risks.
Where do you see rates headed?
BC: Policy rates are too high for the current economic backdrop. I think we’ll see more rate cuts this year, and, by the end of the year, we anticipate that the Bank of Canada overnight rate will be at 4 percent. We could see more rate cuts in 2025.
Does the focus on rate cuts overlook other opportunities?
BC: A number of sectors have been hurt by higher inflation and higher interest rates. In the current environment, based on our models, we think it makes sense to rotate out of cyclicals like retail and travel and more into defensive sectors like utilities and healthcare.
How should advisors and their clients consider incorporating the range of fixed income solutions?
BC: If a client has a large amount of market risk, say, mostly growth stocks or higher-risk stocks, they may consider a fixed income component of their portfolio to provide predictability and protection from downside risk. A client with a more risk-averse portfolio, like blue-chip or dividend stocks, may consider taking on more credit risk through a solution like a global income fund or high-yield bond fund. Then, of course, there are clients with needs in between these two extremes. Bonds can provide an element of defensiveness, so the question is how much of that is required?
For information about ETFs available at TDAM, visit td.com/ETFs.
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¹Aggregate statistics as of June 30, 2024 for TD Asset Management Inc. and Epoch Investment Partners, Inc. Both entities are affiliates and are wholly-owned subsidiaries of The Toronto-Dominion Bank.
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