Morgan Stanley’s Khanduja on Bond Risk Reward: Inside Active

Morgan Stanley's Vishal Khanduja, head of broad markets fixed income, discussed the firm's three analytical pillars for bond selection, emphasizing a strategy of seeking better returns for similar risk compared to benchmarks. Khanduja highlighted the potential for alpha generation through inefficiencies in fallen angels and rising stars, and the importance of bottom-up relative value in portfolio positioning. The discussion, hosted by Bloomberg Intelligence, also touched on the possibility of investment grade spreads widening further throughout the year after a volatile month.

Analysis

Morgan Stanley's head of broad markets fixed income, Vishal Khanduja, anticipates that investment grade bond spreads, having widened during a recent volatile month, could continue to push wider through the remainder of 2025. This outlook, conveyed with a generally cautious tone and a mildly negative sentiment score of -0.3 for the broader market, suggests a challenging environment for fixed income. However, Khanduja, who manages the Eaton Vance Total Return Bond Fund (EIBAX) and ETF (EVTR) – both of which carry a mildly positive sentiment of 0.5 – highlighted his team's active management strategy. This strategy is built on three analytical pillars for bond selection, focusing on acquiring bonds that offer better returns for a similar amount of risk compared to their benchmarks. Key elements of this approach include leveraging the inefficiencies found in 'fallen angels' and 'rising stars' to generate alpha, and employing bottom-up relative value analysis to determine portfolio positioning. This indicates a belief that selective, active management can navigate potential market headwinds and uncover value.

Key Decisions for Investors

• Investors should consider the potential for continued widening in investment grade credit spreads and adjust broad market exposure accordingly.
• Evaluate active fixed income strategies that focus on relative value and identifying mispriced securities, such as 'fallen angels' and 'rising stars', as these may offer opportunities in a potentially widening spread environment.
• Monitor fixed income portfolios for managers employing robust bottom-up security selection processes, particularly those aiming for enhanced returns with risk profiles similar to benchmarks, like the strategies discussed for EIBAX and EVTR.