The portfolio manager for this year's best-performing multisector bond fund is having a hard time finding bonds to buy.
"We see very little value in the market right now," said Henry Peabody, portfolio manager for the Eaton Vance Multisector Income Fund (EVBAX) . "Yields are compressed and investors are not being compensated for the credit and interest rate risk they are taking."
The Eaton Vance Multisector Income Fund is up 19% thus far in 2016, outpacing 99% of its rivals in the multisector bond category, according to Morningstar. The $640 million fund has returned an average of 1.6% annually over the past three years, putting it in the 96th percentile.
Peabody said he is holding a lot of cash in his fund because the systemic and position risks are simply too high in the current market.
"A wise Midwestern investor once said 'cash is a call option on every asset.' And right now, that optionality is extremely valuable," said Peabody.
Peabody attributes his outperformance this year to sticking with a lot of his winning bets from last year, notably in energy and commodity issues. And while he is not putting a lot of money to work in the current environment, he is seeing opportunities in emerging markets like Mexico.
"We think Mexico offers a compelling risk/return tradeoff," said Peabody. "The peso has been weak due to Trump's rhetoric, as well as a poorly timed energy reform policy."
Peabody expects the Federal Reserve to raise rates in December, but proceed slowly from there. He said the transition to higher interest rates could cause a lot of pain for investors who are holding "far too much interest rate risk" in their portfolios.