Anne Walsh, chief investment officer for fixed income at Guggenheim Investments, talks about the challenging year and opportunities ahead in fixed income.

How has Guggenheim Investments helped clients navigate the volatile environment of 2022?

The current year has been a roller coaster for the markets with the high inflationary environment leading to higher rates. During this period Guggenheim has worked to create investment strategies to work within this backdrop. For many of our fixed income client portfolios, we have invested in high quality corporate and structured credit, floating rate assets, and managed duration exposure. For longer- duration clients we work to develop strong asset-liability management solutions. The upside of the challenges of 2022 is that the Fed has "restored income to fixed-income markets," with yields at or near the highest we have seen in several years and spreads among the highest levels across virtually all sectors.

Why should insurers come to Guggenheim Investments for fixed income investment expertise in general?

Guggenheim Investments has over $228bn in total assets as of June 30, 2022, with most of that in fixed income. Guggenheim Investments specializes in insurance asset management: $137bn of our assets under management are general account assets that we manage for 111 insurance clients. More than 250 investment professionals are engaged in the management of assets across fixed income, equities, and alternatives. Risk management is a primary focus throughout our entire investment process. Our asset management style has the potential to be differentiated from other asset managers which may make Guggenheim an excellent complement within a multi-manager framework.

So we know the markets, and we know and understand the unique aspects of insurance company requirements, from both a statutory and an accounting perspective.

Beyond that, Guggenheim Investments team-based fixed-income investment process is built on the foundation of behavioral finance, which explains how decision making is influenced by cognitive biases. Our goal is to mitigate the cognitive biases by disaggregating the primary functions of investment management into different specialized groups and together make better decisions. Perhaps most importantly, we are active fixed-income managers, and it is in environments like 2022 when active management has the potential to shine.

What were some of the key themes for insurers in 2022?

Coming into 2022, from a fixed income portfolio perspective, insurers faced the same theme as any investor: In this period of historic low rates, where to find yield?We call this theme the Core Conundrum. But as the year progressed, the theme shifted to how to mitigate the effects of a historic rapid and sizeable shift in the yield curve.

Guggenheim's approach to solving the Core Conundrum is in sourcing, researching, and allocating to sectors which typically are not included in the broad industry benchmark index, the Bloomberg US Aggregate Bond Index.

In addition to this already difficult challenge, insurance companies have additional conundrums layered on top, including unique asset-liability challenges, the transition from substantial portfolio unrealized gains to substantial unrealized losses, increasingly restrictive accounting requirements, dependency on external ratings, and, most importantly, onerous regulatory requirements. These multi-faceted problems facing the insurance industry are making it harder for life insurers to operate in the competitive financial marketplace.

What are the features of your fixed income strategy to counter the continued volatility in the market?

The risk we are experiencing right now is market risk, not credit risk, so our current focus is on positioning many fixed-income portfolios against continued rising rates. That said, we have been focusing on higher credit quality assets because even though credit has performed well, we will likely see some pressure as economic growth slows with tightening monetary policy. As for market risk, resetting coupons in leveraged loans and floating rate tranches of structured credit would be expected to perform well in a rate-hiking period.

We're very constructive on high quality parts of the credit markets, but it's important to remember that we are in unprecedented economic and geopolitical times. So, maintaining a healthy balance of dry powder to take advantage of future opportunities or at the very least not find ourselves as a forced seller of any point, is very important. With yields on front end cash alternatives in the mid-three percent area, the opportunity cost of keeping some liquidity handy is a lot lower than it's been.

How have you looked to incorporate climate risk principles in your fixed income strategy?

At Guggenheim, we believe that Environmental, Social, Governance (ESG) criteria can meaningfully influence investment outcomes, and that careful analysis of ESG criteria is an important component in evaluating the risks associated with some of our investment strategies, notably certain of our actively managed fixed income strategies.

Climate risk is one of the risks that we evaluate where relevant within our approach to integrating ESG considerations into our investment process. The direct and indirect risks stemming from climate change are broad and capable of producing negative financial impacts over various time horizons. Our sector teams seek to identify the relevant ESG criteria and incorporate them into their risk analysis of an issuer, and then they evaluate those criteria for the level of materiality and the underlying drivers of risk.