Courageous plays
How do you manage portfolios in an environment like that?
“You have to be a little bit contrary or be tactical, meaning you have to buy on dips, but then also be courageous enough to sell when you have a rally in the markets.”
Giesbrecht points to how he favoured the corporate bond sector last year and continues to do so over the sovereign bond sector, because he believes that it will continue to outperform.
The specific focus in the corporate bond space he targets is what he calls the “crossover segment, we call it 5B”.
This covers the corporate bonds that sit awkwardly between investment grade and high yield, where he says he continues to see attractive returns.
“The idea is that we play the story of fallen angels and rising stars, and take advantage of this 5B or BBB, BB segment, where we think it is interesting.”
So if a bond is falling down the ratings, and it goes from AAA to A to BBB, at that stage it gets to a point where it flips over from investment grade into high yield. An investment-grade bond manager is not allowed to hold high yield, even if it is coming back up, and a high yield bond manager is not allowed to own something that just clicked up from BB to BBB, even if they believe it is coming back down.
Crossover zone
That results in a natural shunning of these bonds in this crossover zone, which devalues them, as there is an artificial reason for people to avoid owning them.
This so-called 5B strategy sits alongside the fundamentally weighted strategy bond index strategy described earlier.
Turning to the outlook for 2016, Giesbrecht says in the equity landscape, the team favours Europe, Japan and Switzerland over the US.
“An example why we do not favour US, compared with the other parts of the world, is that the US is under margin pressure. It is in an environment with a relatively high US dollar and in an environment where rates are hiked.
“Within our 45% exposure to equities, we have an overweight to Europe and an underweight to the US.
“We also think it is time to invest in emerging markets. From a valuations point of view it is attractive, but before we increase our allocation in the emerging markets base, we would like to see a stabilisation of the US dollar and of oil.”
