Finding yield in structured products

Fixed-income investors searching for yield without taking on junk bond–level risks may want to look at structured products, a U.S. portfolio manager says.

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With the tight spread in U.S. investment-grade bonds, structured products such as mortgage-backed securities (MBS) and collateralized loan obligations are looking cheaper, said Sam Garza in a Nov. 4 interview. Garza is a portfolio manager overseeing macro asset allocation and collateralized loan obligation teams at DoubleLine Capital in Los Angeles, Calif.

“We have been favouring structured products versus corporates,” Garza said. “There’s more spread there. And usually there’s less interest rate duration: that’s the potential for bond prices to go down as interest rates go up.”

As in Canada, where the housing market has been on a tear, residential real estate has been one of the stronger parts of the U.S. economy, Garza said. With U.S. corporate bonds “fairly leveraged up,” he likes the “strong, stable” housing market, accessed through residential mortgage-backed securities.

Commercial real estate is less stable, but Garza said this creates opportunities in commercial mortgage-backed securities (CMBS).

“U.S. commercial real estate is in the midst of a major transition due to the pandemic,” he said.

Hotels are struggling as restrictions to contain the virus cut down on travel, and the outlook for many shopping malls and office buildings is uncertain.

“It really requires a ground-up analysis, but we like the opportunity set in CMBS,” said Garza, whose firm manages the Renaissance Flexible Yield Fund.

In Canada, BMO launched an MBS ETF earlier this year. Speaking at the Inside ETFs Canada conference last week, Mark Raes, head of product ETFs and mutual funds at BMO Global Asset Management, described the Canadian MBS market as a relatively safe alternative to corporate credit.

“For those looking to make some allocations at the short end of the curve, looking for a little bit more yield but not wanting to add a bunch of corporate bond or credit risk to the portfolio, this is a great diversifier for the portfolio relative to what’s been out there before,” he said at the conference.

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Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.