Endurance test?
Those owning longer-duration assets run the risk that if rates do not fall, or inflation spikes, then the capital appreciation they are expecting does not happen.
Schroders fixed income investor James Ringer says the levels of uncertainty, both in terms of monetary policy, but also election outcomes around the world, make it “difficult to have a multi-year view” right now, and so he says he does not want to be at either extreme of the bond market.
But he says the great advantage bond investors have in the current climate is that, in his view, “you don’t need to take a lot of interest rate risk to get a decent yield right now, and you don’t need to take a lot of credit risk to get a decent yield. But I think what you do need to do is be nimble, given all of the uncertainty in the world.”
Wesley Coultas, head of investment management at Walker Crips, is among those focused on shorter-duration bonds.
His view is that bond market volatility has been such that taking the 4 per cent yield offered by short-duration gilts is prudent, while he says the prevailing economic climate is sufficiently uncertain that he prefers not to take much credit risk.
In order to enhance the yields on some portfolios, he invests in the subordinated debt of well-established companies.
Subordinated bonds have a higher yield because one is effectively second in the queue for repayment behind those who own the first-tier bonds, though one is lending to the same company as the lender of the top-tier bonds.
Christopher Joye is chief investment officer at Coolabah Capital Investments. His view is that it is very hard for a bond manager to add value by predicting interest rate movements and getting the duration right.
So rather than allocate client capital to strategies predicated on being able to do this, he focuses on the prices at which bonds trade at any given time, and with that as a priority he says that right now some of the longer-dated government bonds offer attractive yields.
Matthew Morgan, head of fixed income at Jupiter Asset Management, says building an exposure to corporate bonds that is “recession proof” is likely to be key to delivering positive returns, as he continues to expect economic conditions to deteriorate from here.
Edward Harrold, fixed income investor at Capital Group, says the bulk of returns for bond investors in the coming year will come from the income paid on bonds, and so he is focusing on assets with lower credit risk that offer yield, rather than trying to take more risk on the basis of then being able to profit from the rise in price of some bonds.
