David Roberts

Seven questions to ask a bond fund manager

David Roberts

These are dangerous times for bond investors. Fixed income markets are expensive, with yields low and some short-dated bonds even having negative yields, while there is a record high level of risk. Even government bonds are not the safe haven they are popularly portrayed as.

Bloomberg Barclays Global Aggregate Bond Index


Does this mean investors should avoid fixed income markets altogether? The answer is not entirely, as there are still opportunities to generate returns. But investors must be selective: don’t just buy exposure to the market, understand the level of risk you are taking and ensure your bond holdings are liquid.

 

Are fixed income funds positioned to take advantage of the opportunities and to avoid excessive risk in the market? Here are seven questions that investors should be asking their fund managers.

 

1. Are bonds expensive?

“We own bonds because investors need them and expect us to own them” is not an acceptable answer from fund managers. We, as fund managers, should be honest with investors when an asset class is expensive.

2. Do your fund managers believe there is long-term value in the asset class despite the high prices?

I guess it is possible for prices to rise in the short term. But let’s face it, a fund must sell all its bonds at some point to avoid making a loss. So, is this just a short-term “punt”? Have your fund managers clearly explained their strategy for how they will do this?

3. What is the fund’s exposure to long maturity bonds?

Many funds have significant exposures to long maturity bonds. If this is the case with your fund, ask the managers why they have this weighting. A large exposure means the fund is taking more risk for their investors than ever.

We know bond prices in most cases are at all-time highs and that markets have been heavily manipulated. We know that “holding to maturity” is likely to leave clients with losses in real terms and quite possibly in nominal terms too. What is the fund manager’s plan to exit their long maturity positions?

4. Who will buy your fund’s bonds?

Quantitative easing (QE) programmes are being wound down. Central bankers are calling for more fiscal support. The chances of further mass buying from price insensitive agencies seems to have reduced as, belatedly, they recognise the damage done by QE and her friends. Who else is likely to buy these negative return assets? Who is that greater fool?

5. What are the risks your fund is taking for what are likely, at best, to be skinny rewards?

We gave up “managing to index” or really caring about peers a couple of years ago. If something is wrong for the investor, don’t fund managers have a duty of care to protect her or him irrespective of what “the competition” is doing? What is your fund manager doing to try to mitigate losses for investors?

10 year average G7 bond yield

6. Have the fund managers changed strategy?

Most fixed income funds are likely to have generated much more than 100% returns for investors over the last decade. That was easy. Have your fund managers changed strategy given that valuations today bear no relation to those a decade ago? Your fund managers should be working hard on finding alpha after so many years of markets rising.

7. Why not invest in a passive fund?

There is little merit investing in passive funds in this market environment. They are mandated to chase record prices for record risk.

For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks 

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Global Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Monday, November 4, 2019, 11:30 AM