Damien Hill, senior portfolio manager for the Responsible Horizons Strategic Bond strategy, offered his thoughts on the outlook for credit and bond markets, and provided a breakdown of the strategy’s key attributes.

How would you describe the Responsible Horizons Strategic Bond strategy to new investors?

The Responsible Horizons Strategic Bond strategy is a dynamic fixed income solution that attempts to find the ‘best ideas’ from across global bond markets, while complimenting investors' sustainable investing goals.

The idea behind the strategy is to widen the opportunity set for investors and provide access to relative value opportunities created by unsynchronised market cycles.

We are attempting to provide investors with attractive income and returns from diverse fixed income sources. Our approach is focused on providing consistent outperformance versus the strategy's benchmark in a variety of environments.

How does the strategy pursue its objective?

The strategy allocates across credit asset classes and global government bond markets, combining top-down macro analysis with bottom-up scrutiny of issuers to identify areas of relative value.

This global opportunity set means it has no geographical bias. However, it attempts to garner proportionally greater returns from credit markets than government bonds, as credit markets tend to be less efficient. This creates a larger number of mispricing opportunities for us to take advantage of.

The strategy excludes some sectors – what impact does this have on the strategy’s investable universe?

The strategy applies the minimum exclusions followed by all our Responsible Horizons range. This primarily affects the strategy’s credit allocation. As such, its investable credit universe is reduced by approximately 15%.

However, given the strategy’s ability to invest across a broad range of global fixed income asset classes, these sectoral exclusions do not in our view impede the strategy’s potential for consistent outperformance versus the benchmark.

Can you explain why the strategy considers sustainability in its investment process?

The rationale behind the strategy’s consideration of ESG factors comprises three strands.

Firstly, all the strategies in the Responsible Horizons range apply sustainability criteria which, in our experience, align with many clients’ sustainability preferences.

Secondly, we believe the consideration of ESG factors can help our portfolio managers to manage downside risks and generate outperformance more consistently.

Thirdly, by seeking to invest for a positive impact and engaging with issuers, we think we can help issuers improve their sustainability profiles. For example, if an issuer with a relatively elevated emissions profile can evidence progress towards a carbon reduction, the strategy can own the green bonds of the issuer that are directly financing projects to help reduce those elevated emissions.

How do you view the outlook for credit and government bond markets?

From a macro point of view, we believe economic growth is currently moderating and is at a somewhat of an inflection point, but we are not forecasting a recession as our base case. In a moderating growth environment allocating to issuers with strong credit profiles is preferable, which means a bias towards higher-rated issuers that can evidence strong cash flow generation and solid fundamentals.

In terms of sectoral allocations, we think issuers operating in non-cyclical industries, such as staple goods, food and utilities, are currently more attractive than cyclical issuers who will be relatively more affected by slowing economic growth.

Across government bond markets, we think yields are fair valued and, in some places, pricing in too many interest rate cuts too quickly. Our current bias is to focus on relative value opportunities across markets rather than betting heavily that bond yields will move materially in either direction.