Nick Hayes, manager of the AXA IM Global Strategic Bond strategy
“In a complicated world of low yields, it is important not to rule out government bonds.
“Sovereigns are influenced by huge demand from non-economically driven investors, such as central banks’ quantitative easing policies, and regulated entities like banks and insurance companies.
“A lot of investors focus heavily on the importance of duration, such as whether a portfolio has two, four or six years of average duration. But this year has shown that it is just as important to focus on where one is positioned on the curve as much as duration.
“In Q1, for example, treasuries were selling off while long-dated underperformed short-dated, with curves steepening in the sell off. But in Q2, when treasuries were rallying, long-dated outperformed short-dated, with curves flattening. In the recent sell-off, short-dated has underperformed long-dated, with curves flattening again.
“This year has shown once again that duration and fixed income can be much more dynamic and potentially profitable than many assume. In a difficult environment, government bonds can offer investors an interesting diversifier.”
Investment grade corporate bonds
Jonathan Golan, portfolio manager, Man GLG
“Heading into 2022, the investment grade corporate bond market could be a treacherous place for the passive investors. Yields remain very low due to market expectations for only a modest rate hiking cycle and low corporate credit spreads.
“More than 50% of the investment grade corporate bond market yields less than 2%, implying that even in a benign economic and inflationary backdrop most bonds will not preserve capital in real terms.
“Expensive valuations, however, do not mean that investors should throw in the towel on bonds altogether. The huge depth of the corporate bond universe allows an active investment approach the potential to deliver attractive returns across the cycle.
“The table below shows a basket of select UK investment grade financial bonds relative to the three largest financial issuers of the sterling corporate bond market. As can be seen the active bond portfolio has an attractive yield of 5%, twice the benchmark proxy, despite less leverage and higher profitability of the underlying borrowers.”
Positive impact-focused distressed debt strategies
Sarah Miller, vice-president (manager research) at Redington
“We are increasingly excited by positive impact-focused distressed debt strategies. They provide ‘constructive capital’ to transform businesses and replace traditional cutthroat restructuring funds. We define constructive capital funds as those that avoid hostile operational reorganisations with heavy social costs and instead source opportunities where companies or situations require specialised expertise to recover and draw out unrealised value.
“We believe the opportunity set for impact-focused distressed debt is significant. Why? Because restructuring typically ends with the asset manager having control of or significant influence in the company, with which they can use their expertise to affect positive change.
“Within our research, we have found an increasing number of these ‘impact’ debt investments are being driven by ESG factors. These can include increased environmental disclosures, improved board diversity and other governance measures, implementation of ESG best practices and employment opportunities.”
Mark Benbow, high yield portfolio manager at Aegon Asset Management
“One chart that caught our eye this week was current and historic bid-ask spreads in high yield.
“Feedback that we often receive is that high yield is expensive and at times illiquid to trade. However, underlying data shows high yield at an index level rarely has a bid-offer wider than 40pts and currently this has fallen to a record low of around 25pts (as shown in the chart below). This is an important driver of asset class returns, as credit yields are not far off their record lows. As a result, it is encouraging to see bid-offers and therefore trading costs as a percentage of yield on offer, also come down.
“Banks continue to increase their capital buffers, which feeds through to metrics such as this. More capital intensive activities such as trading can then be given larger balance sheets and subsequently make the space more competitive, lowering bid-offers.
“So the next time you hear high yield is expensive to trade, consider the facts – it has actually never been cheaper.”
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