I recently attended a fund buyers’ conference in London that exclusively showcased a selection of fixed income funds.
I expected this event might be a hard sell –with US 10-year Treasury yields having long since risen from last July’s 1.37 per cent low, a brave new inflationary world pervading our geopolitics and a good deal of central bank distortion.
Surprisingly, the event – which, reflecting interest in the space, was extremely well attended – was characterised by a sense of calm, both among the buyers and the sellers. There was no talk of bubbles or mass sell-offs, and every presentation submitted compelling arguments that supported the asset class.
It’s fair enough to expect a certain amount of buoyancy for an asset class at a conference held in its honour, but it appears that European investors’ love affair with fixed income is far from over.
Pan-European fund-flow data from Thomson Reuters Lipper revealed that global bond products were the most popular selling asset class for 2016, netting more than €22bn (£19bn).
Indeed, of the 10 top-selling fund sectors for 2016, bonds were represented in five categories, including emerging markets, global high yield and global corporate – to the tune of €70bn.
Provisional data from the UK revealed that in the first two months of 2017, strategic bond and global bond vehicles are similarly proving popular, collecting nearly £1bn net despite a small outflow for corporate bond funds.
Investors’ demand for yield is still a highly durable theme, and although the US is tightening, ‘lower for longer’ in the UK and Europe is still providing broad support. The average yield on high yield bond funds is around 4.3 per cent, which is undoubtedly attractive to many investors. Furthermore, ratings migration within credit funds hasn’t materially increased to support yields.
At the end of February the average exposure to BB-rated securities among sterling strategic bond funds was 39 per cent, only a 5 percentage point increase from 2012.
Unfortunately, there was no uniform outlook for the asset class among the specialists at this fixed income conference. And I did not envy the asset allocators who had to recalibrate their bond and equity splits.
Most of the fund managers agreed that the credit cycle was extended, but that it could be undone with geopolitical shocks. Many were short duration and others were writing put options on their portfolios.
Some believed that too much was being priced into the reflation story, some talked of stagflation, and others were concerned about US interest rates and the appreciating dollar.
There was, however, one theme that stood out on the day: the easy bond beta play is well and truly over. For me, at least, this was perhaps the most rewarding insight.
For an asset class where many investors will have itchy trigger fingers, an active fund that is cherry-picking in credit, avoiding huge duration calls and the crowded trades is probably a sensible place to be invested.
