Our Family of Companies
western & southern financial group
western & southern life
columbus life insurance company
eagle realty group
fort washington investment advisors
gerber life insurance
integrity life insurance company
lafayette life insurance company
national integrity life insurance company
touchstone investments
western & southern financial group distributors

Introduction to Flexible Income

By Dan Carter, Austin Kummer, Brendan White
Fixed Income
Share:
diver an example of finding opportunity
  • The Fort Washington Flexible Income Strategy is a multi-sector fixed income strategy designed to provide investors with a high level of current income and total return with a focus on capital protection with differentiated returns compared to traditional fixed income.
  • The strategy is differentiated in the market due to its premium yield, high conviction security selection, diversified approach to sector allocation, unique view of duration management, and high quality bias.
  • Flexible Income provides investors with an expanded investment opportunity set and increased flexibility compared to traditional Core and Core Plus strategies.
  • Fort Washington’s unique approach utilizes cause and effect relationships to assess relative value between asset classes and balances interest rate risk with credit risk. The strategy is implemented by an experienced team of 30+ investment professionals with proven track records overseeing +$50 billion in fixed income assets.1
  • Our positive view on the current economy coupled with fair valuations supports an overweight to risk assets.
  • The strategy has produced top decile performance since inception compared to its peers and has historically outperformed the Bloomberg Barclays Aggregate since inception.2

What Is the Fort Washington Flexible Income Strategy?

The Flexible Income strategy is a multi-sector fixed income strategy that seeks to produce a high level of current income and total return with a focus on capital protection through investing primarily in public fixed income securities. The strategy focuses on flexible sector diversification and high conviction security selection, resulting in attractive risk adjusted returns via multiple sources of yield and alpha.

What Differentiates Flexible Income From Other Multi-Asset Fixed Income Strategies?

Premium Yield. Flexible Income has a top quintile yield relative to its peers, and the yield is well above traditional fixed income strategies (typically 2% over the Bloomberg Barclays US Aggregate).3

High Conviction Security Selection. Bottom-up security selection in fixed income has proven to be a reliable source of alpha. Flexible Income is a portfolio of typically 125 – 175 issuers, focusing on the best ideas of our investment teams.

Sector Diversification. Non-traditional fixed income strategies often have large concentrations in a single sector, such as high yield or preferred securities. Flexible Income is broadly diversified by sector, resulting in multiple sources of return.

Duration Management.
Unconstrained fixed income strategies take large, and sometimes negative, duration positions. Flexible Income uses duration as a risk mitigation tool, and seeks to avoid taking large duration positions due to the difficulty in predicting interest rates.

Quality Bias.
Flexible Income has a top quintile yield without taking excessive risks. The average credit quality of the holdings in the strategy is Investment Grade rated, while the average credit quality of most portfolios in the peer group is rated as High Yield.

Why Invest in the Strategy Today?

Flexibility. Having the flexibility to react to market dislocations in a timely manner can be a benefit of non-traditional fixed income approaches such as Flexible Income.
 
Enhanced Return. Multi-Sector bond strategies have outperformed traditional strategies over the past 5, 10, and 15 year periods3 with only a moderate increase in risk.

Higher Yield. For investors looking for increased yield, Flexible Income, on average, is likely to provide a yield in excess of the Bloomberg Barclays US Aggregate by 2%,4 higher than most traditional strategies.

Expanded Opportunity Set. Traditional strategies are largely invested in sectors and securities that are represented in common market indices. Flexible Income goes beyond common market indices into areas that may be less trafficked, providing more opportunities for alpha.


Portfolio Diversification.
Traditional strategies are often invested in the major index sectors of Investment Grade Corporates, Securitized, and Government Securities. Flexible Income provides dedicated exposure to diversifying fixed income asset classes with low correlation to traditional fixed income strategies.

What is the Investment Process

Flexible Income Investment Process

How Is Relative Value Between Asset Classes Assessed?

The Fort Washington Flexible Income strategy takes a value investors approach to investing. This means the strategy focuses on measurement, not forecasting, and makes explicit measurements of risk and return. For each asset class, we make return estimates for two scenarios: growth shock, or recession, and normalized, or upside. Once these estimates of risk and return are made, it allows for an apples to apples comparison of the risk-adjusted attractiveness between different asset classes.

This forward looking approach based on cause and effect relationships is differentiated in the market place, where most investors use traditional relative value and risk metrics involving historical correlations and volatility.

How Is Interest Rate Duration Managed?

Rather than taking large duration positions within the strategy, we use interest rate duration as a valuable risk mitigation tool. Interest rates often fall when risk assets sell off, as investors flee to less risky assets such as Treasuries. By maintaining exposure to interest rate duration, the strategy has downside protection in volatile environments—a characteristic often desired when investing in fixed income.
 

Who Manages the Strategy?

The Fort Washington Flexible Income strategy is managed by a deeply experienced team of 3 portfolio managers and over 30 sector portfolio managers and analysts. This same team, the multi-sector fixed income team, is also responsible for the management of the Fort Washington Core, Core Plus, Intermediate Fixed Income, and Short Duration strategies.  
 
The portfolio management team consists of Dan Carter, Austin Kummer, and Brendan White, who average 22 years of experience and 19 years with the firm. This team is responsible for the overall risk appetite, sector allocation, duration, and macro positioning.
 
The strategy utilizes sub-sector portfolio managers (Investment Grade Corporate, High Yield, Structured Products, Emerging Markets Debt, etc.) for the composition of the sub-allocations (i.e., bottom up positioning). These portfolio managers have discretion over their sub-portfolios subject to overall portfolio risk, sector constraints, duration risk, and other targets set by the aforementioned portfolio management team (e.g., sector or duration may be constrained due to portfolio risk management).
 
The Flexible Income investment team manages over $50 billion in assets across a variety of fixed income strategies.
flexible income overview* Includes assets under management as of 12/31/2020 by Fort Washington Investment Advisors, Inc. of $65.1 billion and $4.3 billion in commitments managed by Fort Washington Capital Partners Group, a division. 
** Registration as an investment advisor does not imply any level of skill or training. 
 

How Is the Portfolio Positioned Today?

Allocation. The strategy entered 2020 near the lower end of its risk target as valuations were expensive across most sectors and the economy was in the late stages of the cycle. This conservative positioning at the start of the year, coupled with the flexible investment approach of the strategy, allowed the team to be active buyers at a time when market participants were overwhelmingly sellers in March and April. The strategy invested approximately 25% of the portfolio across High Yield, Investment Grade Credit, and select Public Equities at deeply discounted prices during that time. These allocations were a positive for performance as market functionality was restored and asset prices continued to recover throughout the year. Although valuations appear fairly valued at this point, our positive economic outlook warrants an above average target to risk within the portfolio. The largest sector allocations as of quarter end were Investment Grade Credit (23%) and High Yield (24%). Non-investment grade exposure is currently 42% compared to 27% at the start of the year and below the 50% target maximum. The portfolio has ample liquidity to take advantage of market opportunities with 17% invested in U.S. Government securities and cash.

Selection. Within investment grade credit, we favor less cyclical sectors such as utilities, healthcare and financials with an overweight to discount floating rate notes. Our High Yield exposure is a balance of highest convictions ideas and broad market and sector exposure. Within Securitized, our exposure is concentrated in whole business ABS, non-agency CMBS, and CLO opportunities where we believe risk is mispriced. Emerging Market Debt positioning is in US Dollar denominated debt, favoring corporate borrowers versus sovereign. We continue to like Business Development Companies, which provides exposure to middle market loans with significant yield premiums to public markets.

Rates. We believe interest rates are fully valued in the near term and reflect the improving economic outlook and policy response of the Fed, but are likely to move modestly higher throughout the year. The Flexible Income strategy is naturally less sensitive to interest rates compared to traditional fixed income strategies. Our current interest rate positioning is less a prediction on interest rates, but more used as a risk mitigation tool as we look to balance interest rate risk and credit risk. Absent a severe inflationary environment, moderate interest rate exposure provides important downside protection should risks materialize and risk assets underperform.

Portfolio Characteristics (As of 12/31/2020)5

  • Weighted Average Yield to Worst: 3.6%
  • Effective Duration: 3.9
  • Weighted Average Maturity: 6.9
  • Number of Issuers: 150  
Flexible Income Characteristics

1 Assets as of 12/31/2020, across multiple strategies.
² Inception date of 7/1/2017. Past performance is not indicative of future results. Peer rankings are based on gross performance relative to the Morningstar US Multi-Sector Bond Universe.
3
 Source: Morningstar Multisector Bond Universe and Intermediate-Term Bond Universe as of 12/31/2020.
4
 Source: Bloomberg, Fort Washington.
Source: Fort Washington and Bloomberg PORT. Past performance is not indicative of future results. Portfolio characteristics subject to change at any time without notice. Supplemental information, Flexible Income GIPS report for full performance and disclosures is available upon request.
Assets as of 12/31/2020. Includes assets under management by Fort Washington of $65.1 billion and $4.3 billion in commitments managed by Fort Washington Capital Partners Group (FW Capital), a division.

This publication has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information and statistics contained herein have been obtained from sources believed to be reliable but are not guaranteed to be accurate or complete. Neither Fort Washington nor its sources for the content herein are responsible for any damages or losses arising from the use of this information. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of Fort Washington.

dan carter

Dan Carter

Senior Portfolio Manager
Dan is Managing Director and Senior Portfolio Manager, focusing on diversified broad market fixed income portfolios. He received a BS from Miami University and is a CFA charterholder. 
austin kummer

Austin Kummer

Senior Portfolio Manager
Austin is Vice President and Senior Portfolio Manager focusing on portfolio management and research functions within Total Return Fixed Income, Multi-Strategy, Private Debt, and Dividend Equity. He received a BBA from Ohio University and an MBA from Xavier University. He is a CFA charterholder.  
Brendan White

Brendan White

Co-Chief Investment Officer
Brendan is Senior Vice President and Co-Chief Investment Officer of Fort Washington. He received a BS from The Ohio State University and an MBA from Xavier University. He is a CFA charterholder. 

Related Investment Strategy

Related Insights