For nearly two decades, Morgan Stanley portfolio manager Andrew Szczurowski has been honing his fixed-income investing strategy. These days, he’s still finding attractive investments in the market, but admits some digging needs to be done to separate the winners from the losers. As a portfolio manager on the Eaton Vance Strategic Income Fund , he looks for opportunities across a broad range of assets, including those that have been typically underrepresented. Eaton Vance was acquired by Morgan Stanley in 2021. Szczurowski called the fund a “multi-sector, go anywhere strategy” that has underlying assets with a weighted average of investment grade. However, it can also take a bit more risk, he said. ETSIX 1Y mountain Eaton Vance Strategic Income Fund one-year performance His strategy has paid off, with the fund earning a five star rating from Morningstar . Its A share class (ETSIX), available to retail investors, outperformed the category average return by 2.2 percentage points annualized over a 10-year year period, according to Morningstar. ETSIX has a 6.15% subsidized 30-day SEC yield, a net expense ratio of 1.46% and a net adjusted expense ratio of 1.02%. Its hefty fees land it in the second-highest quintile among peers, Morningstar said. A barbell approach The fund managers take a bit of a barbell approach to portfolio construction, with high quality assets on one side and riskier investments on the other, Szczurowski said. The team includes two other portfolio managers, each with differing areas of expertise. Szczurowski focuses on securitized products since he is also the co-head of Morgan Stanley Investment Management’s mortgage and securitized investment team. ETSIX’s highest allocation is in agency mortgage-backed securities (MBS), about 34% of the portfolio as of Jan. 31. It also has exposure to emerging market bonds, high yield bonds and floating-rate loans. Finding winners The macroeconomic environment for fixed income is still “OK,” but it is getting late in the cycle, Szczurowski said. “There’s still plenty of opportunities for active fixed income investors, but they’re just not in your traditional Treasurys,” and investment grade corporates, he said. “You have to turn over a lot of rocks to find these.” One of his favorite sectors is commercial MBS, which makes up about 4% of the fund. He “hated” the sector for about a decade and kept the allocation to under 1%. But the values of the buildings fell dramatically after the Covid pandemic, he said. “These buildings have been sold, turned over, reappraised at what we think of now as reasonable, attractive valuations and yields on those buildings,” Szczurowski said. “There’s still land mines out there, and we have a team of commercial mortgage backed analysts that are combing through these deals to find the attractive ones.” He’s sticking with CMBS that benefit from the high-end consumer, who is still doing well in the so-called K-shaped economy marked by a divergence between higher-income and lower-income consumers. Szczurowski likes Class A office buildings, either new or newly remodeled with high-quality tenants. They also have long-term leases, which insulates investors from risks such as AI disruption, which recently took down some office stocks . “We’re investing in a five-year bond, but the underlying people who are leasing in the building a lot of times have 10-, 20-year leases,” he said. “We’re very comfortable going into those.” The University of New Hampshire business school alumni also finds high-end malls attractive, as well as luxury hotels. On the investment grade side, he prefers agency MBS over corporate bonds, since spreads in the latter are tight. When spreads are tight, investors get less compensation for taking on added credit risk. He sees agency MBS as “an appropriate parking place while we wait for something to develop out the risk spectrum on the corporate side.” Lastly, there are opportunities outside of the United States, specifically in emerging markets, Szczurowski said. Money has been flowing in as investors look to diversify away from the U.S. dollar, he said. “You can’t paint emerging markets all with one broad brush, but we do think that there’s a great tailwind in the emerging market space that we think can continue for some time as you have relatively attractive yields and [it] provides some diversification,” he said. One of his favorite trades is Egyptian bonds, noting the positive reforms in its economy. He also likes Kazakhstan, Nigeria and Turkey.
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Friday, September 11
