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Nontraditional Strategies to Consider in a Rising Rate Environment

Nontraditional Strategies to Consider in a Rising Rate Environment

Virtus Investment partners, a multi-manager asset-management business, discusses why advisors need to consider preferreds and bank loans, as well as the importance of diversification within a clients portfolio. Tom Lydon (CEO of ETF Trends) moderates a webcast on strategies for approaching non-traditional allocations.

George Goudelias (head of leveraged financing, senior portfolio manager at Seix Investment Advisors) discusses how interest rates rise and it is important to observe if the yield slope flattens or steepens.

We are out of practice with rate hikes. It has been a dozen year now that we have had a very benign interest-rate environment. And certainly there are people who don’t know this, says Goudelias. Goudelias believes advisors should be careful with their investments and try to reduce duration.

Leveraged loan lenders and bank loans should be able to take advantage of the current economic environment. Goudelias explains that the economy has seen its strongest growth in recent years and that a GDP growth of around 3.5% this year would be a positive. Active management is essential at this time. Advisors are judged not only by their successes but also by the pitfalls they avoid in volatile markets.

Jay Hatfield, CEO at Infrastructure Capital Advisors, says he expects preferreds with a yield of 5-8% to generate income this year, even though they are sensitive to stock market movements. Because of the aging population and $52 trillion in assets, flattening yield curves, slow growth in Europe, China, and an aging population, Hatfield remains positive on interest rates.

We only do publicly traded companies, preferreds and publicly traded companies. They care about their credit ratings and most are looking for investment-grade. Hatfield says they have made commitments with rating agencies, their board, as well as other constituencies to maintain their credit-quality, which is different from private high yield bonds.

John Bartlett CFA, president, portfolio manger, and analyst at Reaves Asset Management believes utilities could be a good investment because they have their own yield, even though they are sensitive to interest rates. Hatfield believes utilities are well-positioned for this year because the Fed is removing liquidity from the market. This causes momentum stocks to suffer, while utilities, which are typically defensive dividend stocks, do well.

Bartlett states that we believe that utilities are a better alternative to fixed income.

Because utilities are acyclical, their rates are determined by assets invested in them. With the expectation that earnings will inevitably be correlated to investments, he believes that utilities should be considered their own asset class. This basically means that as long a utility can continue investing in itself, it will continue producing revenue. The current position of utilities is one of the best Bartlett has ever seen in his career.

Strategies for Investing

The Virtus InfraCap U.S. Virtus InfraCap USAThis portfolio is focused on income, has the potential to deliver attractive total returns, and is actively managed. The portfolios beta is increased by a modest 20-30%, while options strategies are used in order to increase current income.

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The IncraCap REIT Preferred Equity Trust (PFFR) The only ETF that allows diversification in preferred securities issued to REITs. These securities have attractive fixed income and equity characteristics and low equity beta. This security subset has a lower leveraged exposure, which equates to a more predictable revenue stream than banks and insurance companies.

The Virtus Seix Senior loan ETF (SEIX).The company is actively managed, manages credit risk, and focuses on BB and B-rated loans. This allows us to invest in some of the most undervalued and healthiest credits in the non-investment grade space. Leveraged loans offer lower correlations to fixed income classes and the possibility for higher income.

The Virtus Reaves Utilities ETF, (UTES). It seeks to deliver strong risk adjusted performance through energy exposure that’s actively managed using a long-term strategic that focuses only on companies that the subadvisor is familiar with.

Financial advisors interested in learning more about strategies for rising rate environments can view the webcast on demand.

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