In today’s fixed income environment, multi-asset portfolio builders face a unique challenge. Rate cuts have been telegraphed, but Michael Gates, Head of Model Portfolio Solutions, believes curve positioning is limited, making it difficult to generate meaningful alpha in a capital-efficient manner. Rather than place a sizable curve bet, he prefers to hold slightly longer duration than our benchmark and deploy rate duration as a hedge against equity risk.
With spreads historically tight6, opportunities to capture economic upside are hard to find outside of equities. Within more fixed income-heavy portfolios, one segment he finds compelling is convertible bonds. These securities combine the defensive qualities of bonds—income and a level of downside protection—with the option to participate in equity upside through conversion features. The team has coined this “upside with airbags.” Importantly, the issuer base in the convertibles market differs significantly from the traditional investment-grade and high-yield universes, leaning more toward technology, growth-oriented companies, and even bitcoin treasury firms. This makes convertibles a distinctive way to gain exposure to transformative economic themes, such as the AI revolution, while still remaining anchored in fixed income.
This reinforces the importance of a whole-portfolio approach. Diversification remains central when looking across sectors, geographies, and even asset classes adjacent to fixed income, such as precious metals and other alternatives, which may complement traditional bond exposures. By broadening the fixed income toolkit in this way, investors may be able to balance income generation, capital preservation, and participation in economic growth—even as the traditional levers of curve positioning and spread compression appear more limited.
