BlackRock’s fixed income team is also worried about duration risk inherent within the benchmark and, it is partly for this reason Scott Thiel, BlackRock’s deputy chief investment officer of fixed income, fundamental portfolios said the firm has launched a number of unconstrained funds.
Asked in a roundtable in London if the firm was having to take a more active approach to bond investing given the lack of yield, he said: “Because coupon rates have fallen, the interest rate exposure in the market has gone up. That is simply a factor of the bond math.”
Pointing too to the decline in the yield cushion now available, He added investors are now having to take a more unconstrained approach and trying to take advantage of capital appreciation or the movement of securities through time, rather than sitting back and letting the carry push them through.
Echoing this point Jozef Prokes, manager of the BGF Euro Corporate Bond Fund, said that while yields are compressed, it is “simply not true the alpha generation” is not possible.
Acknowledging that “beta returns are played out” in European bond markets, he said, what this means is that, more than ever, managers do not have to compromise on style.
“You don’t have to chase beta returns so you can focus on alpha generation,” he said.
This is, if nothing else, a very positive spin on the outlook for an asset class whose traditional forms have now reached nosebleed levels in many cases.
But, it does serve to highlight some of the ways in which bond managers are beginning to think about an asset class that they know better than anyone has been a fantastic ride for a very long time.
What is encouraging is that they still see opportunity, in this new world of negative rates, a land very much of “shadow and substance” to quote the Twilight Zone. What is equally clear is that the role bonds play, how they act within portfolios needs some interrogation.
