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The future of bonds: two fund managers share their perspective

With interest rates at historic lows, and some even giving negative yields, it is not always easy to navigate the world of bonds. So how do you make the right selection? And what does the future hold for this asset class sought by investors in search of regular income and capital protection?

Two experts share their insights: Fatima Luis – Senior Portfolio Manager – and Andrew Lake – Head of Fixed Income Teams. Together, they jointly manage a bond fund at Mirabaud Asset Management.

Rarely do people end up in the bond business via the same route, or for the same reason. Andrew Lake's destiny was already mapped out. His family has always worked in finance. And as his experience grew, he began to specialise in this asset class. For Fatima Luis, on the other hand, this career path was not preordained, although she had always yearned to work in the world of international relations. With its mix of politics and economics, the bond market fulfilled this aspiration.

These different paths brought them together, and today they find themselves at the helm of a bond investment fund, one of the best-performing in the sector no less, despite complex market conditions.

What are your views on the current bond market?

Fatima Luis Between financial crises, political uncertainty and regulatory changes, navigating the changing landscape requires real expertise. As for the world of bond investment, the picture is still not clear as we don't know if the growth and inflation that we see today will continue in the long term. The bond market is also heavily influenced by politics. We therefore need to pay particular attention to this kind of risk as we are in a period that continues throw up surprises. 

What approach should we adopt to identify good opportunities?

F. L. Choosing good securities is no mean feat. You have to be rigorous and methodical. We take a top-down macro-economic approach to get a clear view of the entire market. In this context, monetary policy, inflation rates and global growth enable us to determine the areas that offer the best investment opportunities. We then come down a notch to choose the sectors and companies that should benefit most from these trends. We are currently focusing on corporate bonds, in particular industrial and energy securities, which offer better prospects than sovereign bonds, such as those from developed countries. With such low, even negative, yields, these have become unattractive to those expecting regular returns. 

Andrew Lake Our top-down analysis is complemented by a bottom-up analysis of instruments, sectors and markets to identify the best options and grow the capital invested at any given time. This not only enables us to monitor portfolio risks, but also to limit the negative impacts of market volatility in the short term.

And what about the emerging markets?

A. L. Each economic zone has its own rhythm, which inevitably creates investment opportunities. With their significant growth potential, emerging markets continue to offer good prospects, which explains why they continue to attract our attention. In terms of investment, it is, however, important not to be too dogmatic. I am still convinced that keeping an open mind is more profitable. In fact, certain contexts make some assets more attractive, even though at other times they would be less so.

Do you lean more towards active or passive management?

A. L. Intuitively we are led to believe that building a bond portfolio simply consists of choosing high-quality securities based on strong convictions, then collecting coupons over the life of the bond plus return of the original investment upon maturity. This is now a thing of the past. Active management of the duration and exposure to credit throughout the economic cycle is the main catalyst for good performance. Given the low interest rates in most countries around the world, it is clear that adopting a passive approach will not satisfy investors' demands in terms of yields or the preservation of capital.

Interest rates create particular market conditions. How do you manage this factor?

F. L. We believe that interest rates will gradually continue to rise. This change should undoubtedly create future opportunities for investors seeking bonds with high yields. However, we need to remain prudent: if they increase too quickly, yields could make the price of certain bonds fall, which would not be without consequences for those who have already invested in these securities. Our funds take a flexible and global approach while being managed in an active manner. Given that certain high-yield bonds are more closely correlated with shares than interest rates, they could become attractive if bond prices were to increase too quickly.

Some investors are not earning any income from their bonds, which have negative yields. So, why purchase them if they do not offer any returns?

F. L. Those who do so have pessimistic views on growth and inflation. They are convinced that they will lose more money if they invest elsewhere, so they are prepared to pay more for quality to ensure better protection for their assets but we do not invest in negative yielding bonds.

What risks are involved when opting for bonds?

A. L. Traditionally, we distinguish between two types of risk in relation to bonds: inflation and issuer default. While sovereign bonds are a lot more sensitive to the former, the second risk more generally concerns corporate bonds, even if it is not uncommon for a government to be unable to honour its debts. Greece in 2015 is only the most recent example in a long history of sovereign defaults.

F. L. To protect against inflation, we are primarily interested in high-yield or short-term corporate bonds. To counteract the risk of default, it is just as important to have the necessary expertise within the team to understand the fragilities of a company through its balance sheet.

Why is it so important to work in teams in your management activities?

A. L. Even though the final investment decision is made by Fatima and I, we are supported in our day-to-day work by a talented team, without which it would not be possible to manage the funds in such a flexible way. However, with Fatima and I, neither is predominant. We always work together in consensus. 

F. L. Andrew and I have worked as a team for many years. Our collaboration is harmonious because it is based upon mutual understanding. And if we disagree about something, we have enough confidence in each other to arrive at a joint decision.

What is your aim in bond management?

A. L.  In the context of fund management, our aim is to generate a positive return versus the index throughout a complete economic cycle, while managing volatility to limit the risk of losses. We therefore try to put in place effective solutions to offset trend reversals, such as we have seen over the last few years. We also aim to minimise the consequences for portfolios of the interest rate normalisation process. This enables us to offer our clients products that are both highly attractive and extremely competitive. 

Mirabaud Asset Management

Mirabaud Asset Management is focussed exclusively on asset management and provides institutional clients and financial players with access to a broad range of funds and mandates. Mirabaud Asset Management is focussed exclusively on asset management and provides institutional clients and financial players with access to a broad range of funds and mandates.  

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