Ian Winship, portfolio manager in the BlackRock global unconstrained fixed-income team, says it has also meant that how one invests in fixed income needs to change.
The old way of investing in fixed income, he explains, was to have three or four-strong conviction views or trades, which is fine if one gets it right.
But, given the level of liquidity and violent gyrations seen in recent months, there is a much stronger possibility that it could go really wrong.
“What you have to do now is have a lot more trades, a lot more teams available,” he says. “Getting your money in is not the problem, you have to be able to get the money out and, to do that, you have to be thinking about more trades.”
Roger Webb, co-manager of the Aberdeen Strategic Bond Fund, agrees.
He says: “The ability to be flexible and to not be tied to a benchmark is crucial, as is the ability to hedge duration risk. It is also important to be adequately aware of liquidity. It is very apparent the FCA is keen for us to stress that liquidity is poor and needs to be managed.”
As Winship puts it: “People have looked at fixed income for the past 30 years and it has been nice. But, if you are going to get anywhere near that now, you are going to have to work a lot harder to achieve nice, dull returns.
“Because the past 30 years have been pretty much all one-way, there are a lot of fixed-income products now that are not really relevant for today. We have been focused on trying to ensure we make our product relevant for when rates bottom out. But it is not easy.”
The waiting game
As the product providers search for relevance, what are investors doing?
According to Sullivan, while Coram’s approach to investing has evolved, it has not lost sight of its end game – to protect a client’s wealth.
“There is seldom a bad time to take profits, which is something we have done modestly over the past week. Cash is as good an investment at present than it has been for quite some time but we hope it remains an interim measure.”
Walker Crips director Chris Kitchenham is also of the view that rate hikes are coming and, as a result, he says the firm is currently allocating to funds that have little exposure to duration risk.
“We are much happier to take on credit risk than duration at the moment,” he says.
Chris Iggo, CIO for global fixed income at Axa investments, says given how nervous bond markets have been, there has been a strong trend toward reducing risk and building up cash buffers.
He says: “Many investors are waiting to re-invest but they would like to see higher yields before doing so.”
He adds that the firm is of the view that the global economy is doing fine and, in that context, it still likes the fundamentals for credit and high yield.
But, he says: “We also know that the potential for increased demand for fixed income is there and becomes evident when there are new issues coming to the market. There have not been many of them in Europe recently, given the increase in volatility, but I suspect the last third of the year could see bond markets become very hot again.”
