Fixed maturity portfolios: Lock in yields while you still can

February 19, 2025

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Joseph Galzerano and Richard Smith answer five questions on why fixed maturity portfolios aim to offer investors an opportunity to lock in attractive yields, manage risk effectively and enjoy greater visibility on returns, all while navigating today’s shifting interest rate environment.

1. Why consider a fixed maturity portfolio?

Over the past three years, rising interest rates have reshaped the fixed income landscape, restoring the value of income investing. However, the future path for interest rates remains uncertain.

• In the US, the new administration’s focus on economic growth could lead to inflationary pressures, keeping interest rates elevated and adding volatility.
• In Europe, the European Central Bank (ECB) has pivoted to rate cuts in response to economic weakness across the eurozone.
• Globally, geopolitical tensions have added another layer of uncertainty, increasing potential volatility in credit markets.

In this environment, fixed maturity portfolios (FMPs) can provide a strategic way to capitalize on current yields while ensuring greater stability and return visibility.

2. What are some of the key characteristics of FMPs?

In our view, the current environment presents an opportunity to secure attractive yields without taking undue credit risk through an allocation into an FMP, which offers:

• Locked-in yields: Investments made during the initial investment period protect against potential future rate declines by securing currently elevated yields.
• Portfolio visibility: Since most investments are held until maturity, investors have a clearer view of expected returns.
• Potential for enhanced return with less volatility: This can be achieved by investing in a ‘crossover strategy’ – blending investment-grade and high-yield bonds into a single portfolio. These funds are designed to absorb short-term market fluctuations, ensuring a smoother return profile.
• Stability of returns: FMPs are structured to provide steady returns over a defined period, focusing on income generation and consistent and frequent distributions. Investors can redeem before maturity, although there is a price adjustment mechanism whereby transaction costs from outflows are paid for by those exiting to protect remaining investors.

3. How are these types of strategy managed?

This type of strategy should be assessed via the lenses of risk management and credit selection. A bottom-up, fundamental credit approach is critical to identifying mispriced investment opportunities in both investment-grade and high-yield bonds. Diversification and disciplined risk management are also essential, ensuring concentration limits on individual issuers and sectors.

4. How does this approach address reinvestment risk?

Since FMPs have a finite life, duration risk is limited and continues to decline as the fund nears maturity. Reinvestment risk should also be considered, but it can also be mitigated by:

• Investing in bonds with maturities aligned with the fund’s life.
• Using bullet bonds to prevent early call risks.
• Rebalancing outperforming credits before maturity and reinvesting in bonds of a similar tenor for additional return potential.

5. Why does experience matter?

Navigating fixed maturity investments requires expertise and experience. Investors should consider active managers with a proven track record across multiple cycles, who can effectively construct and manage FMPs across varying market conditions.

While the macroeconomic outlook remains uncertain, we believe FMPs offer an attractive opportunity to secure steady income, manage risk and capitalize on today’s elevated yields. Now may be the time to lock in yields – before the window closes.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of February 2025 and may change without notice.

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