Inflation will drive asset allocation

Jeff Benjamin [00:00:03] Hello, there, my name is Jeff Benjamin, and this is Three Questions. Today we’re talking to Cliff Corso, president and CIO of Advisors Asset Management, a $42 billion asset manager. How are you doing, Cliff? 

Cliff Corso [00:00:16] Doing fine. How are you today, Jeff? 

Jeff Benjamin [00:00:18] I’m great and thanks for being here. We’re going to we’re going to throw three quick questions at you, and I know that the focus here is going to be mostly on fixed income and income in general. But let’s see where we go. All right. First question, how do you foresee inflation impacting asset allocation in the new year? 

Cliff Corso [00:00:36] I think it’s going to have a major impact on asset allocation. We’ve seen that inflation has been very, very sticky and persistent. Even the Fed has pivoted. The Fed has finally given up the old playbook of its transitory. And so we think that’s the main reason they pivoted on the rate not only to tapering, but tightening. So we do think rates are going to rise. So inflation is going to drive asset allocation as rates rise because such a big part of the narrative in the last year or two has been that growth stocks, lower cash flowing stocks have been the place to be. The challenge with that with that thesis, is that as rates rise, the present value of those way out in the future, cash flows drops. And so it’s a big headwind to that sector of the market. Conversely, sectors that cash flow and sectors that have value added cheap value, we think, will begin to take that baton more solidly and be the be the leadership sectors of the market as we move into 2022 

Jeff Benjamin [00:01:39] as markets continue to be volatile. Are there any specific sectors of the bond market you’re paying closer attention to right now? 

Cliff Corso [00:01:47] Yeah, indeed we are, Jeff. With rates rising is a little bit of a headwind to the fixed income markets. Even last year, we saw the broad market was off. About one bond market was off about one and a half percent. Very, very rare in the history of the index, which is in the 70s, has been a handful of times where it’s produced a negative total return. But that’s primarily because rates are on the rise, and that’s a negative for bond prices. We think that dynamic continues to play out this year, and therefore we’re keeping a careful eye on the longer end of the market. That’s the part of the market that is the most sensitivity to rate rise rate increases. So we’re looking at opportunities that are shorter maturities for those less price set sensitivity. And we’re also looking at the non risk free parts of the bond market because we get a little bit more income by investing in credit, and that is a cushion to rising rates as growth rates rise. So those are some of the things that we’re focused on in the bond market this year. 

Jeff Benjamin [00:02:46] Where can investors turn for alternative sources of income right now? 

Cliff Corso [00:02:50] Yes, I think it’s an important question because with rates rising, still, the public markets in fixed income are very, very low yield and we don’t think rates are really going to spike, so people should be looking at alternative income opportunities. We particularly like a couple of sectors, for example, we do like bank loans. Bank loans tend to be high yielding. They’re typically below investment grade, so you get a nice component of yield and we think the economy is solid. So default risk will be low. But very importantly, the structure of bank loans are such that they float their floating rate instruments, which basically means that as rates rise, that coupon you get will reset higher and higher along with the rates. So we think that’s a good alternative investment opportunity, as well as REITS over in the equity market. Even with fixed income, people are looking away from fixed income to income producing equity like securities, and we think the REITS are another great example. Good yield. We happen to think that certain types of REITS will benefit from the reopening of the economy and as well obviously have an equity upside to boot. So those are a couple of examples of alternative income opportunities. 

Jeff Benjamin [00:03:58] All right. Really good stuff. Ways to find some income out there in this market. Cliff Corso President and Chief Investment Officer, Advisors Asset Management Thank you very much, Cliff. 

Cliff Corso [00:04:09] Thank you, Jeff.