With bond yields hovering near historic lows, there is a case being made for some active trading in the fixed-income space.
Brendan Clark, president of Clark Capital Management Group, has been using exchange-traded funds to take advantage of what the bond market is offering, and right now that means high-yield.
“In the interest-rate environment we're in and moving into, which is dramatically different from the past 30 years, an opportunistic approach is required,” he said.
With that in mind, Mr. Clark says ETFs allow him to manage a fixed-income separately managed account portfolio dynamically. Using a relative-strength research process, he moves freely and sometimes quickly between exposure to high-yield and high-quality corporate bonds and short-term Treasuries.
The portfolio is currently favoring high yield, with separate 45% allocations to iShares iBoxx High Yield Corporate Bond ETF Ticker:(HYG) and SPDR
Barclays Capital High Yield Bond ETF Ticker:(JNK).
The portfolio is rounded out with 5% allocations to iShares JPMorgan USD Emerging Markets Bond ETF Ticker:(EMB) and iShares S&P U.S. Preferred Stock Index ETF Ticker:(PFF).
The strategy, which Mr. Clark launched in 2004, took on its current high-yield slant in early July. Prior to that, there was a three-month stretch during which the portfolio tilted toward higher-quality bonds. “We look for volatility in credit spreads and we take advantage of that,” he said.
While the portfolio has seen some major adjustments this year, it was “solidly in the high-yield camp” from April 2009 through August 2011, he said.
Through the first six months of this year, the separate account gained 2.6%, net of fees, which compares to a 2.4% gain by the
Barclays U.S. Aggregate Bond Index over the same period.
While Mr. Clark, who is a frequent guest on CNBC and CNN, recognizes the appeal of
dividend income from equities in a low-rate environment, he thinks it's a mistake to use dividends as a replacement for bond income.
“Investors are starved for yield and they're being pushed out on the risk spectrum to get yield, but I disagree with the notion of abandoning fixed income because of the lower yields,” he said. “It's a challenge, but it could also be an opportunity because I believe we will continue to see aftershocks of financial crisis and we will continue to see opportunities.”
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