Multi-Manager

Flexible thinking in fixed income

It’s now over a decade since the beginning of the global financial crisis
May 2018
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Risk Disclaimer

Capital is at risk, the value of your investments and any income from them can go down as well as up and you may not get back the original amount invested.
 
Investing in emerging markets is generally considered to involve more risk than developed markets and changes in interest rates can affect the value of fixed interest holdings and may adversely affect the value of your investment.
 
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

It’s now over a decade since the beginning of the global financial crisis – an event which signalled the start of a 10-year period of unprecedented stimulus and low interest rates.

As the developed world economies transition back towards more ‘normal’ conditions (by which we mean higher interest rates as inflation ticks upwards and the withdrawal of quantitative easing (QE)) many investors are rapidly seeking to adjust their exposures, particularly among fixed income assets as higher interest rates raise the potential for losing money as bond prices fall.
 
Duration management is seen as key and many are seeing the potential merits in reducing sensitivity to interest rates. Of course, this isn’t a particularly new theme and during the world’s economic recovery there has been ongoing debate about a bubble in bond markets. One option is to increase the emphasis on short-duration assets – a move that reduces risk of capital loss as rates rise but also pretty much means an acceptance of virtually no investment return.
 
Faced with the latter we felt it wise to seek other options – of course our clients want us to be mindful of their capital but they’re entrusting us with their money to generate a return.
 

Opportunities in emerging debt

 
In this context, select pockets of emerging market debt look attractive – they offer higher yields and in contrast to developed markets like the US and UK, which stand at the start of a rate rising cycle. In many emerging markets inflation has (or is) falling and interest rates are on a downward trajectory. Mexico for example has raised rates 12 times since 2015 and looks to be at the peak of its cycle. In Russia, South Africa and Peru the central banks are cutting rates. Whilst not facing the same debt related issues as their counterparts in the developed world, emerging market central bankers have dealt with their own challenges (like commodity price falls); Elvira Nabiullina, was named central banker of the year by several publications in 2015 and 2017 in recognition of her efforts to steer the Russian economy through these challenging times. There are numerous opportunities in the asset class and the potential risk/reward payoff can be compelling. For example, the nominal yield for the emerging markets local currency market (which is 85% investment grade and only five years in duration as a market) is 6.1%, a real yield of 2.8%.

Risk Disclaimer

Capital is at risk, the value of your investments and any income from them can go down as well as up and you may not get back the original amount invested.
 
Investing in emerging markets is generally considered to involve more risk than developed markets and changes in interest rates can affect the value of fixed interest holdings and may adversely affect the value of your investment.
 
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

“We see opportunities among floating rate assets (variable coupons linked to interest rates) and particularly in asset backed securities.”

Specialist expertise

 
We also see opportunities among floating rate assets (variable coupons linked to interest rates) and particularly in asset backed securities where higher volatility and comparative lack of liquidity is offset by higher yields. These instruments can be complex but we believe the likes of 24 Asset Management and SQN Asset Lease Finance have the expertise to navigate this space and allow us to gain exposure to this potentially attractive source of return.
 

Seeking the right blend

 
We currently choose to blend these more ‘specialist’ opportunities with a collection of strategically managed vehicles. Understanding the talents of managers, their views and current positioning is key here as we look to combine individual funds into a more complementary whole. Just now, for example, we like the Janus Henderson Strategic Bond Fund’s nimble duration allocation and high-quality credit selection, Invesco Perpetual Tactical Bond Fund’s scope to move swiftly from a more defensive positioning and Legg Mason Macro Opportunities Fund – a fund run by a team with proven skill in responding well to changes in expectations in interest rates and the yield curve.

“We currently choose to blend these more ‘specialist’ opportunities with a collection of strategically managed vehicles.”

The last 10 years have been far from ‘normal’ but after such a prolonged period of stimulus many investors are seemingly finding it difficult to readjust their expectations. Investment has always been about judging the balance between potential rewards and risk but is also about assessing the full breadth of opportunities on offer. Flexibility is key. Currently, duration related risks are obviously a key consideration in certain markets but that doesn’t necessarily require a hunkering down in short duration assets yielding very little. Look further afield and you’ll find markets at a different stage of the cycle, and remember that volatility is ‘normal’, which in turn provides opportunity for the patient.