Michael Arno, CFA
Written Research
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The outlook for Brazil currently is clouded by several issues, but greater clarity is expected in the coming months. The country recently emerged from a crippling truckers’ strike only to face new economic challenges from rising oil prices and the U.S. dollar. Political uncertainty is expected to subside following the upcoming general election, allowing the focus to shift to much needed pension reforms.
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We believe an unconstrained, fixed income strategy that invests globally may help uncover value across asset classes, countries, and currencies; a global, multi-sector strategy is an ideal way to balance the search for value with protection against various forms of market volatility.
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With credit markets in the late stages of the credit cycle and interest rates at record low ranges, yield-starved investors have been forced into lower-quality assets and potentially more volatile sectors. Unfortunately, this reach for yield often introduces investors to unwanted, heightened risk, including higher default risk and interest rate risk. Relative to this new backdrop, we believe investing in BB/B-rated credit represents an attractive solution for investors as both a complement to lower-yielding investments or as a replacement for low-quality, high-risk alternatives.
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Given its attractive risk-return profile, we believe global high yield should be considered as a permanent part of an overall asset allocation, even as a surrogate for an equity allocation.
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We believe investors should access emerging markets debt (EMD) through a global high yield manager, rather than a stand-alone EMD allocation or a semi-dedicated allocation within core plus or domestic high yield strategies. This paper examines the differences between approaches and details the growing size of the opportunity in emerging markets fixed income.
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