Interest rates are hitting multiyear highs at a time when most portfolio managers have never dealt with this phenomenon before.
The U.S. 10-year Treasury note yield rose to its highest level since 2011 on Tuesday, while the short-term two-year yield traded near levels not seen in about a decade, raising concern about how portfolio managers will navigate this changing investment landscape.
But most of them have never operated in a rising rates environment. The median tenure of an active equity manager is eight years, according to Fundstrat, citing figures gathered from Morningstar.
The last time rates were in a significant uptrend was from 2003 to 2006 before the financial crisis struck.
"There are a lot of people that haven't been through many things in this youthful industry," said Timothy Parton, a portfolio manager at J.P. Morgan. "The time when rates are rising coincides with a period in the cycle that is tough for any manager. You don't want to be too cautious, but you don't want to be too aggressive too early."
The Fed slashed the overnight rate down to zero in 2008 during the aftermath of the financial crisis. The central bank's goal at the time was to stimulate the economy. Now that the economy is out of its financial-crisis trough, the Fed has started to gradually hike rates closer to historical levels and market rates have responded.
Since late 2015, the Fed has raised rates a total of six times — including once this year —bringing the overnight rate to a range of 1.5 percent to 1.75 percent. Market participants are expecting the Fed to raise rates at least twice more in 2018 and many think they may even raise four times.
"We're concerned about rising interest rates," said Walter Price, senior portfolio manager at Allianz Global Investors. "Last year, we got a lot of multiple expansion. We think that's unlikely in a rising rate environment."
J.P. Morgan's Parton and Allianz's Price have seen their share of rising-rate cycles. Parton has worked in portfolio management since the late 1980s, while Price has 45 years of experience in the financial industry.
Parton has managed the JPMorgan Growth Advantage Fund (VHIAX) — a four-star rate fund — since 2002. Over the past 15 years, the fund has returned 13.5 percent, according to Morningstar. The fund is also ranked in the 2nd percentile of the "Large Growth" category and has $8.6 billion in assets.
He said the key to successfully dealing with rising rates is investing in companies "that will continue to deliver regardless of the economic cycles." He named Facebook as an example of such companies. "Your Facebook engagement won't go down if you lose your job. If anything, it will go up."
Parton's Advantage fund owns just over a million Facebook shares, making it one of its biggest holdings.
Allianz's Price, meanwhile, has co-managed the AllianzGI Technology Fund Class C (RCGTX) fund since its inception in 2002. Over the past 15 years, the fund has returned 13.8 percent and ranks in the 22nd percentile among "Technology" funds, according to Morningstar. The fund also manages $1.6 billion in assets.
"What you have to do is look for companies with high earnings or low valuations," Price said about investing when rates are rising.
He also said he likes semiconductor stocks right now, noting that "many of the semis are priced like the cycle is ending. People think earnings are peaking for those companies, but we think they can continue to grow." Price's fund owns 1.2 million shares of Micron Technology, as well as 99,650 shares of Nvidia and 608,810 shares of Marvell Technology, Morningstar data show.