Johnson Wealth Fixed Income Tilts at Emerging Markets Debt, Mortgage Backed Securities

Johnson Wealth’s director of fixed income strategies is prioritizing emerging markets debt and mortgage backed securities, and reducing exposure to high yield and alts.

Ron Alberts told With Intelligence that the $7.7bn Wisconsin RIA is adopting a conservative strategy in its model portfolios as it looks for signs of a Fed pivot and wider credit spreads.

“Credit spreads are wider, but we don’t believe elevated recession risk is adequately priced into the market; we prefer to wait for better entry points to add credit,” Alberts said.

“We believe there are opportunities now, such as merging market debt and agency mortgage-backed-securities, and more opportunities will arise as the Fed completes its hiking cycle,” he added, noting that MBS yields relative to Treasury bonds have imported, largely due to potential government and bank selling pressures.

Alberts pointed to the early repayment risk in MBS as a bigger factor than credit risk for total returns.

Alberts sits on the firm’s investment committee, alongside equities director Jason Herried and director of alternatives Jonathan Henshue. They invest in SMAs for large accounts, mutual funds and ETFs for smaller accounts, and interval funds for private credit.

At the beginning for 2021 Johnson was meaningfully weighted towards shorter duration bonds, and it has reduced that allocation to neutral.

“Our philosophy regarding duration, or interest-rate-sensitivity, is to remain neutral, or positioned similar to the benchmark, except at extremes,” Alberts said.

He thinks that recent collapses in the banking sector and the risk of further collapses may expedite a Fed pivot, leading to more attractive opportunities in high yield fixed income. 

“We are positioning portfolios to take advantage of additional opportunities should spreads widen further and believe heightened volatility will determine when the Fed pauses or begins cutting rates,” he added.

Founded by retail heir Samuel C Johnson, the wealth management arm of Johnson Financial currently invests in six fixed income managers, four alts managers and around 12 equity managers. “Our portfolio is more conservatively positioned right now than it typically would be, because the volatility is heightened,” Alberts said.

As seen in With Intelligence.