An Optimized Approach to Core Plus Portfolios
Over the last decade, low interest rates and reduced expectations for potential returns in traditional asset classes have helped increase the popularity of fixed income Core Plus funds. These investment strategies, which typically combine a “Core” fixed income portfolio with alternative assets such as Global Bonds, Emerging Debt or Preferred Shares (the “Plus” component of the Core Plus), are designed to bring investors the additional yield that cannot be found within a traditional bond universe portfolio.
At Fiera Capital, we believe that great value can be obtained from a Core Plus strategy. However, significant care needs to be taken in the design of this type of investment solution, in order to minimize potential downside risks and liquidity stress during unfavorable market environments. In practice, this can be particularly challenging considering that in order to generate the additional yield, most Core Plus funds typically exhibit increased credit risk and reduced liquidity versus traditional Core mandates.
From a risk-return perspective, the selection of asset classes to include in the “Plus” component of a Core Plus fund plays a great role in increasing return and managing the overall volatility of the portfolio. What is equally important and much less discussed, however, is the many ways in which these additional asset classes can be integrated within the “Core” component of the Core Plus fund. Our belief is that to generate the best value from your Core Plus investment, both the Core and Plus components need to be carefully engineered to minimize overall volatility, tracking error and downside risks of the portfolio.
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