Interest Rate Climate Calls for Different Investment Approaches

There are limits on what can be accomplished with a traditional approach to fixed-income investing for the foreseeable future, says Sean Rhoderick with PNC Capital Advisors.

By John Manganaro | September 22, 2016
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Despite years of record-low interest rates and cautiously optimistic signals from the U.S. Federal Reserve, Sean Rhoderick, chief investment officer of taxable fixed-income products for PNC Capital Advisors, says there’s little reason to suspect interest rates will normalize soon.

Acknowledging the hazard in making strong forward-looking predictions, Rhoderick is confident enough to say there’s “more reason than not to suspect we’ll be hovering around these interest rate levels for a decent amount of time still.” At least for the intermediate term, he says, investors will very likely have to accept low returns on fixed-income assets by historical standards.

“We have seen that the U.S. Federal Reserve is being hesitant to push rates higher too quickly out of the overhanging fear of stalling growth,” he tells PLANSPONSOR, “and very few other central policymakers in other important markets are likely to be any more aggressive than the Fed.” And so, with institutional and retail investors alike left waiting for a change in direction, “it makes sense to think about new types of approaches and exposures.”

At PNC Capital Advisors, Rhoderick says a lot of thought is “going into credit assets, generally speaking.” He suggests the perceived safety of government bond securities, on top of the low rate environment, has dramatically reduced the opportunity to generate returns on cash or cash-like assets that does not also come along with some real risk.

“We are cautious about corporate debt, of course, but we still feel it’s an increasingly important asset class for investors to consider,” Rhoderick explains. “We advocate for a defensive approach that closely considers moving up in credit quality and shorter in duration. There may be emerging opportunities in asset-backed securities as well. Shorter maturity securities have given us an opportunity to take prudent credit risk at very attractive spreads and yields compared to what is possible in U.S. government bond markets. It’s something we can do carefully and over the short term.”

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