London - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by volatile investor sentiment, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. The following are excerpts from a recent conversation with Jeff Mueller, Co-Director of High Yield Bonds and Multi-Asset Credit Portfolio Manager, Eaton Vance Advisers International Ltd.
What we are seeing: We are seeing once-in-a-decade type sell-offs across higher-yielding parts of the credit markets and what we hope to be once-in-a-lifetime economic disruptions putting strains on corporate and government balance sheets around the world. We have also seen indiscriminate falls in asset prices, not just concentrated on some of the worst effected sectors (leisure, travel, gaming, etc.). We are seeing our core investable markets, high-yield corporate bonds (HY bonds) and floating-rate loans (loans) imply the worst ever default and recovery environment that we have seen in history. While we are certainly seeing an increased likelihood for defaults and restructurings in HY bonds and loans, we are also seeing opportunities to invest in businesses that we believe have the tools to endure and survive this pandemic at extremely attractive price and yield levels.
What we are doing: We had been taking some risk off the table on the way into and during the early part of this sell-off, choosing to hold higher levels of cash across our portfolios. This has provided some much-needed stability to the portfolio amid this turmoil and provides us with some dry powder to take advantage of the opportunities starting to open up. Within income markets, we believe that HY bonds and loans are two markets offering some of the best opportunities for long-term total returns. Where we have cash available to invest, we are starting to buy what we think are high-quality HY bonds and loans at very attractive yields and prices.
What we are watching: At a more macro level, we're watching the rapidly evolving news cycle relating to the outbreak of COVID-19. Alongside this, we are closely watching the (potentially) coordinated response from policymakers around the world. Lockdowns won't last forever and the strength and efficacy of policy response will be of critical importance to how well economies and financial markets can rebound when the dust settles on this pandemic. At a micro level, we are closely watching the liquidity challenges that certain companies in certain sectors might face, as we continue to dig for great investment opportunities amid the increased volatility.
Bottom line: We will always stick to our investment process. We don't try to call the bottom (prices) or wides (credit spreads) but take the opportunity to buy into asset classes like high-yield corporate bonds and floating-rate loans that look like they're offering once-in-a-decade valuation opportunities. A multi-asset credit approach may be a great way to take advantages of some of the best opportunities that are opening up across credit markets.