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Investment Uncovered: ‘A golden age for bonds’

Why JP Morgan’s chief investment officer is predicting a fixed income boom

Being upbeat about bonds might seem unusual at a time when investors are facing low returns and high volatility.

But for JP Morgan Asset Management international chief investment officer Nick Gartside, who oversees the US asset manager’s $460bn (£341bn) fixed income business, there are reasons to be cheerful.

“The beauty of bonds is that you have certainty,” says Gartside, who has been a bond investor for almost all his 20-year career in asset management.

He explains what made him turn away from equities and decide to work on bonds when they were not a popular choice among graduates as he started his career.

Gartside says: “A bond investor has to blend macro with micro economics, while equity investors look at companies and say they don’t think about macro.

“Also, the bond market is now worth $100trn, so twice the size of the equity market. Not all bonds are equal and that is what gives me a buzz about it.”

Gartside, who previously had stints at Schroders and Mercury Asset Management, started managing emerging market equities at Mercury after a masters in international relations.

He says: “At Mercury I was a bit horrified at the beginning about bonds. If you think about fund management you think about equities, so I was a bit unsure on bonds, but then I changed my mind as bonds became much more related to politics than equities. With markets you either have an interest or you don’t.”

Gartside landed his current job at JP Morgan in 2010 and is currently responsible for the fixed income investment process in the London business.

He says: “Our ethos is to be a money lender. We find a bond we like and buy and sell it and that is what clients want.”

Gartside has a team of 280 in the fixed income unit, who will prove very important next year as asset managers face the multiple requirements of Mifid II and  need strong resources for research as a result.

He says: “[Having a large team for research] is going to be important for the bond market.

“You can buy a bond and run to maturity. But while a bond was a buy and hold investment in the past, now it has become a bit more flexible. They are big and global, so you have this unconstrained idea of bonds now.”

Gartside notes that since 25 per cent of sovereign bonds currently have a negative yield, bond managers would need to rotate in different parts of the market as valuations and other factors have changed.

The way the CIO is adapting to the new trend is by having a low duration in the portfolio and a higher allocation to emerging market and high yield bonds.

Gartside says: “A few years ago we had no emerging market bonds. Now the asset class ranges from 20 to 30 per cent of our holdings and that will stay at this level in 2018.

“Emerging markets are healthier than they were [in the past] and normally emerging markets are a good beneficiary of growth. You have double digit yields in countries like Brazil, Turkey, and Indonesia.”

In October fixed income was the best-selling asset class with net retail sales of more than £2bn, according to the Investment Association. Of this figure, more than £1.5bn went into strategic bonds, with £84m going into the global emerging market sector.

In comparison, only £13m flew into UK gilts.

Gartside argues that with an expected growth of 1.5 per cent in the UK economy and a potential fall in inflation, the Bank of England could raise rates twice next year, which won’t be beneficial for Government bonds.

He says: “As you look forward you’ll see a lot of differentiation when it comes to bond investors. You’ll have an environment of both stock picking and bond picking. Companies’ growth will be reflected in bonds.”

As for his review of 2017, Gartside says this year was a “classic transition year” for all asset classes.

He says: “From the post-financial crisis era we are now at a golden age for bonds. This was a year where growth has surprised on the upside following a 2016 where growth was departing in some countries.

“Global growth was synchronised and you have had a good global growth picture. But some economic data can have a lagged effect for next year.”

Gartside expects growth to continue next year but argues that the higher than expected inflation in markets globally could pose a risk to investors. He says: “Central banks are likely to raise rates and a bit of inflation will return.”

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