Investment Solutions

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Related Insight

Fixed Income Investing During Volatile Times: Keep Calm and Know Your Risk

We believe investors benefit by sticking to a process throughout the inevitable ups and downs of market and economic cycles. This is especially important during periods of extreme volatility when even the most seasoned investors are susceptible to letting emotions slip into their decision-making.

Since early 2020, the novel coronavirus (COVID-19) has had an unprecedented impact on global economies and financial markets. For fixed income investors, it is times like these when adhering to a disciplined, risk-focused process is paramount. We believe the role of fixed income in an investor’s portfolio is to provide risk mitigation, stable income, and a low correlation with risk assets; we seek to consistently apply an investment process that reflects this philosophy.

Delivering for Our Clients

Towards the end of 2019, we believed valuations in Credit had become increasingly unattractive, leading us to reduce allocations in corporate credit across strategies, instead favoring AAA-rated structured securities or increased Treasury weightings. Consistent with our focus on risk, we believed that while the macroeconomic and fundamental backdrops at the time were still very healthy, the compensation to take risk was insufficient for doing so. This defensive positioning helped us take advantage of credit opportunities as the impact of COVID-19 created abundant market dislocations.

As corporate credit spreads repriced dramatically wider during March, we capitalized by taking advantage of the dislocations in short-dated markets by purchasing high-quality bonds that were seemingly being indiscriminately sold by asset managers needing to meet client outflows amid the volatility. These outflows, coupled with a lack of liquidity in markets, led to instances of quality debt trading at deeply distressed levels. In longer-dated strategies, the new-issue market provided what we believed were excellent opportunities to selectively add exposure to highly rated companies in defensive industries, with ample balance sheet flexibility, and at attractive spreads.

With troubling infection rates in the US and a difficult second quarter earnings season, we continue to maintain a vigilant stance in portfolio positioning. While the “Fed put” has mostly limited the potential for substantial spread widening, downside risks remain elevated based on the sustainability of the recovery. We’ve maintained our defensive overweight to corporate credit, particularly in the Financials and Energy sectors, while taking some profits in select issuers where valuations have returned to pre-COVID levels.

Our disciplined investment process was instrumental in delivering positive excess returns for clients across our portfolios in the first half of 2020. Equally as important was effectively managing volatility along the way by carefully monitoring sector exposures and individual risk positions. The speed with which markets have moved this year has been breathtaking and at times somewhat counterintuitive. Despite the likelihood of additional fiscal stimulus and more accommodation from central banks, we expect a continuation of volatility from risks that we see (e.g., COVID-19, US politics, and continued economic pressure) and those that aren’t clearly evident but likely to emerge in a world facing unique challenges.

Our Client Value Proposition

Our goal as an asset manager is twofold: To provide clients with a persistent excess return profile over an entire economic cycle and to minimize undue performance volatility. The cornerstone of our investment strategy is risk analysis and management.

Comprehensive risk analysis is incorporated into every step of the investment process. Portfolio construction and management is viewed through a risk-return lens with a focus on consistency. Our investment team continuously evaluates sectors, issuers, and securities using a consistent “FVT” (Fundamentals, Valuation, Tactics) framework to provide a common lens to evaluate relative risk and potential volatility. Furthermore, we perform ongoing quantitative analysis as we seek to ensure the primary dimensions of risk are consistent across our strategies and that client portfolios are in line with their desired objectives.

While we apply the same key principles and investment process across all our strategies, to exemplify our process in action, we would point to key risk characteristics of our Core Fixed Income strategy, as it represents a broad maturity/duration profile and wide range of fixed income sectors (Exhibit 1). We believe our ability to consistently produce investment results with more downside protection and less volatility than a majority of our peers is a direct result of our disciplined, risk-focused process.

Composite Investment Results

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As of 06/30/20. Source: Advent Portfolio Exchange® (APX). Performance returns are presented gross and net of fees and include the reinvestment of all income. Gross of fee performance returns do not reflect the payment of investment advisory fees and other expenses related to an account. Actual returns will be reduced by the advisory fee specific to an account and other expenses that may be incurred in the management of the account. Please refer to our GIPS®-compliant presentation, which includes additional disclosures and is located at the end of this presentation. Past performance is no guarantee of future results.

Important Disclosures

This publication is for informational purposes only. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice, a forecast, or a guarantee of future results.

PNC Capital Advisors, LLC claims compliance with the Global Investment Performance Standards (GIPS®). To receive a list of composite descriptions of PNC Capital Advisors, LLC and/or a presentation that complies with the GIPS® standards, please contact us.

PNC Capital Advisors, LLC is an indirect subsidiary of The PNC Financial Services Group, Inc. PNC Capital Advisor’s strategies and the investment risks and advisory fees associated with each strategy can be found within Part 2A of the firm’s Form ADV, which is available at

©The PNC Financial Services Group, Inc. All rights reserved.

Firm Description: PNC Capital Advisors, LLC (PCA), a registered investment adviser and direct wholly owned subsidiary of PNC Bank, N.A. (PNC Bank) and indirect wholly owned subsidiary of The PNC Financial Services Group, Inc., offers investment management services with respect to taxable fixed income securities for a variety of clients. The firm’s list of composite descriptions is available upon request.

Significant Events: As of December 1, 2019, PNC Bank migrated the Municipal Investment Group and the Advantage Equity Portfolio Management Group from PCA to the PNC Investment Strategy & Services division of PNC Bank’s Asset Management Group. As of November 15, 2019, PCA transitioned away, through acquisition, its International Growth Equity, Select Small Cap Equity, and Structured Equity teams. The transaction also included the reorganization of PNC Bank’s family of mutual funds, formally managed by PCA into corresponding third party mutual funds.

Compliance Statement: PNC Capital Advisors, LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. PCA has been independently verified for the period beginning September 29, 2009 through December 31, 2016 by Ashland Partners and Company, LLP, and for the periods January 1, 2017 through December 31, 2019 by ACA Performance Services. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Core Fixed Income Composite has been examined by Ashland Partners & Company LLP for the period February 11, 2008 through December 31, 2016, and for the periods January 1, 2017 through December 31, 2019 by ACA Performance Services. The verification and performance examination reports are available upon request.

Composite Description: The investment objective of the Core Fixed Income Composite is to seek current income as well as preservation of capital by investing in a portfolio of high-and medium-grade fixed income securities, with portfolio duration and structure characteristics benchmarked to the Bloomberg Barclays U.S. Aggregate Bond Index. The Core Fixed Income Composite was created December 31, 2000 with an inception date of December 31, 1992.

Benchmark: The benchmark for the composite is the Bloomberg Barclays U.S. Aggregate Bond Index. The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Bloomberg Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index and represent the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.

Minimum Account Size: All discretionary accounts in excess of $5 million have been included in the composite. Prior to December 31, 2019, the minimum account size was $10 million.

Calculation of Results: Accounts are valued using trade date accounting and are denominated in U.S. dollars. Performance results reflect the reinvestment of interest, dividends, and realized capital gains and include cash, cash equivalents, convertible securities, and preferred securities, if applicable. Dividends and interest are recorded on an accrual basis and are gross of all applicable foreign withholding taxes, if any.
Performance results are presented on a gross and net basis and include the reinvestment of all income. The net results reflect the deduction of 0.40% prior to June 30, 2010; and 0.35% thereafter, representing the maximum advisory fees charged to client accounts during the respective periods in the Core Fixed Income Composite. The actual fees paid by a client may vary based on assets under management and other factors. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request. Past performance is no guarantee of future results.

Significant Cash Flows: As of January 1, 2012, PCA defines a significant cash flow for the portfolios of the Core Fixed Income Composite as one or more external cash flows during the month equaling an absolute value greater than 10% of the portfolio’s assets at the beginning of the month.

Dispersion: The dispersion of annual return is measured by the standard deviation across asset-weighted portfolio returns represented within the composite for a full year. Prior to January 1, 2010, the dispersion of annual return was calculated across equal-weighted portfolio returns. For periods during which five or fewer accounts were included in the composite for a full year, standard deviation is not disclosed because it is not considered meaningful.

Fee Schedule: The management fee schedule is as follows: 0.35% on first $15 million, 0.30% on next $35 million, 0.25% on next $50 million, 0.20% on next $100 million and 0.15% on anything over $200 million. The actual fees paid by a client may vary based on assets under management and other factors.

  • Corporate credit generated the largest average excess return, but exhibited greater volatility and higher overall interest rate risk (as measured by effective duration).
  • Agency MBS had an average spread comparable to that of corporate credit with considerably lower return volatility and interest-rate risk.
  • Consumer ABS offered the lowest overall interest rate risk, as well as the lowest volatility of return.

Next we examine each of these sectors in more detail.


We focused our analysis of the corporate credit sector on investment-grade securities, defined as BBB-rated and above. The profile of the corporate credit index can be deconstructed into two primary factors that describe risk and return: default risk and spread duration risk. We define default risk across three quality buckets: AAA-AA, A, and BBB. These ratings represent the average rating assigned between the primary credit rating agencies. Similar to modified duration, which measures a bond’s price sensitivity to changes in yields, spread duration measures price sensitivity to changes in credit spread. We believe it is a good proxy for duration risk of excessreturn, as opposed to duration risk of totalreturn (modified duration).

The table below shows excess return, volatility, and MIRs over various credit quality and bond maturity segments.


  • BBB-quality categories have had the highest average excess returns. Additionally, the A-quality segments have outperformed the AAA-AA tier in all maturity groups less than 10 years.
  • Longer-maturity segments have not necessarily driven larger average annual excess returns. In fact, across credit quality groupings, the 5- to 7-year maturity category has generated the highest excess returns.
  • The 10-plus-year maturity group had the lowest mean returns across the maturity landscape. Lower realized excess returns can be partially explained by demand from asset-liability managers and insurers with long-term liability targets. Demand from this investor base has compressed spreads in longer-dated securities and flattened credit curves. In addition, longer spread duration amplified the price impact from changes in risk premiums, which led to a greater proportion of time periods exhibiting negative excess returns than other maturity segments.



  • Within all credit quality segments, longer maturities resulted in substantive increases in return volatility; larger spread durations at longer maturities amplified volatility.
  • Lower credit quality was also associated with increased return volatility across maturity categories. The table Spread Between Minimum and Maximum OASillustrates the wide variation of risk premiums among these segments over the past 22 years, as measured by option-adjusted spread (OAS).

Modified Information Ratio (MIR)

  • While shorter-maturity groupings have generated the most attractive risk-return profiles (the highest MIRs), the magnitude of average annual excess return in these segments is generally limited.
  • Lower-quality and longer-maturity credit have the potential to provide opportunities to maximize excess return.


Between 1997 and 2019, AAA-rated ABS and agency MBS sectors exhibited significantly less volatility of excess return than nearly all credit sectors, resulting in compelling MIRs. Additionally, there was a low correlation of excess return between structured products and the corporate credit sector over the 22-year period, due in part to the high-quality and shorter-duration profile of structured products relative to the overall credit index.

We believe structured products provide an important source of diversification and can improve the risk-return characteristics of an overall portfolio. The diversification benefit provided by incorporating structured products in an asset-allocation strategy can be illustrated by comparing two portfolios, one consisting solely of government and credit sectors (Bloomberg Barclays Government Credit Index) and the other that includes structured products (Bloomberg Barclays Aggregate Index).

As shown in the following table, adding structured securities to a government-credit portfolio over the period 1997 to 2019 would have produced an enhanced average annual excess return, a reduction in return volatility, and a higher MIR.

When constructing a portfolio, there are additional aspects of the MBS and ABS sectors to consider.


  • Interest-rate volatility has the largest impact on relative performance of MBS. The inherent prepayment-convexity risk of these securities affects the timing of cash flows from monthly amortization of principal and interest.
  • The MBS and corporate credit sectors are driven by different economic and market dynamics: interest-rate volatility (MBS) versus business fundamentals and corporate default cycles (corporate credit).



  • While the ABS market has very little exposure to prepayment volatility, and relative performance is not interest-rate driven, the sector has shown a low correlation with credit overall due to limited exposure to the corporate business cycle.
  • Additionally, ABS securities benefit from structural enhancements that boost credit quality. These include cash reserves, overcollateralization and/or subordination, which can mitigate the loss potential for investors at the top of the capital structure.
  • Structured securities can play an important role in optimizing the risk-return profile of a fixed-income portfolio.
  • The enhanced income and relatively low volatility historically offered by AAA-rated consumer receivables make the sector an important component in the construction of a risk-focused portfolio.
  • We believe the credit card and prime auto segments of the ABS market are high-quality, liquid asset classes with an attractive risk-return profile.


We believe opportunistic sector allocation, coupled with an investment process focused on risk management and identifying relative value opportunities should result in consistent risk-adjusted returns over a full market cycle.

Over the last several years, we’ve experienced a wide variety of interest rate and risk regimes. We’ve adhered to the tenets of our risk-based philosophy throughout and used these opportunities to evaluate the findings of our historical analysis in practice.

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