There is not a lot of value investing in developed market government bonds, according to Greg Michel, head of fixed income and currency research, JANA, but there is still a lot that investors can do in the fixed income space.
“What we recommend is they identify the concerns they want to focus on, for example diversification, and then explore segmenting the yield curve,” he says.
“As a house we have a negative view to fixed income. As bond yields become zero, the maturity of bond yields becomes its duration.
“We are saying to clients in a generic sense, about purely government bonds, we don’t see a lot of value particularly in developed markets. But there are lots of things clients can do – but they should look at what is the purpose of fixed income in their portfolios. Are they looking for income or yield, diversification against growth assets, liquidity and [in] some cases inflation protection?”
Graeme Bibby, chief investment officer, AIA, says the investment environment has been “really, really” challenging.
“Fixed income is a place we have to be. In Australia 90 per cent of our portfolio is in fixed income. Every day we have to think about interest rates.”
He says, in his business, both the margins from underwriting and the investment margins have been challenged.
“The challenge is that the long term return assumptions for pricing are based on higher returns, so the long term assumptions need to be revised down.”
Bibby’s portfolio can take a reasonable amount of liquidity risk, and goes to BBB-rated securities, and beyond if need be. They separate the credit and the rate decisions.
Bibby is not afraid of volatility, and makes the most of it by being slightly different to the market consensus.
“We look for leading indicators – and look to be slightly different – and play the volatility as much as we can,” he says, adding that he doesn’t expect a ‘return to normal’ in his working career.
Brett Lewthwaite, head of fixed income and currency at Macquarie Investment Management, spoke about containment of the investment environment.
“Central banks have indicated to us they can’t afford this cycle to end, things are too fragile for that, so if they’re going to keep this contained, what does that mean for us?” he says.
“Two things most economists don’t talk about in this situation: the impact that the debt – and servicing it – has on yields; and our dependency on central banks. Those two things will make it hard for bond yields to do anything other than jump around and give us a few scares, but they will probably stay low.
“So the question to leave us all is, in the longer term, is 2 per cent enough after admin costs?”