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August 2023 / INVESTMENT INSIGHTS

Buy and Align—The Next-Generation Buy and Maintain Portfolios

Introducing the Net Zero Transition Product Framework to help clients meet income and climate goals

Executive Summary

Climate change and the transition toward net zero1 represents a large systemic change in financial markets that will likely impact almost all securities and asset classes over time. To help clients navigate this complex and challenging transition, we have developed a Net Zero Transition Product Framework and applied it to a “buy and maintain” corporate bond strategy. The framework seeks to deliver financial returns and manage risk while promoting energy transition.

The large global investment‑grade corporate bond market offers a plethora of opportunities. For some time now, a popular choice for those investing in this asset class has been a “buy and maintain” approach. We believe the environment for these strategies remains attractive. At the same time, climate considerations are becoming ever‑more paramount for some investors—either because they recognize climate as a bigger risk factor to the delivery of financial performance or because they have a desire to direct investment capital toward decarbonization. The buy and maintain approach can be enhanced to account for certain climate targets—what we have termed a “buy and align” strategy.

What Makes a Buy and Maintain Strategy Attractive?

Attractive income opportunity

A standard buy and maintain strategy in investment‑grade corporate bonds currently offers the potential to earn an attractive income. The sharp rise in government bond yields during 2022 has propelled yields in the asset class materially higher. At the end of June, the yield on offer in global investment‑grade corporate bonds was over 5.2%2—a level rarely seen in the past decade.

Potential for lower transaction costs

Bonds are typically held for a longer period in a buy and maintain approach, so there is less portfolio turnover or need to transact in the secondary market. This can help lower transaction costs compared with higher‑turnover portfolios. This is particularly important as central banks continue to remove stimulus support from markets, which could impact liquidity conditions and make it more expensive to transact in the secondary market.

Fundamentals strong heading into a downturn

Investment‑grade companies are underpinned by strong fundamentals. This is particularly important given a slowdown in global economic growth, which could have knock‑on implications for profits and balance sheets. This should, however, be partially mitigated given that many companies are entering the slowdown from a position of strength. We expect the majority of credits to be able to withstand this downturn, and rating downgrade risk appears limited. According to JP Morgan, only 1.6% of the euro corporate investment‑grade universe was affected by an agency rating downgrade in the first five months of this year.

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IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

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