I have remarked a number of times how the 2008 financial crisis has been tortuously difficult for many fund managers to navigate. Indeed, it is still ongoing in my view.
One obstacle has been the words and actions of central bankers across the globe that have effectively manipulated financial markets. Many investors have reacted instantaneously to just a few choice words of central bankers, leading to some rapid movements in stock and bond markets.
Last summer, for example, we saw a 1.5 per cent upwards move in US Treasury yields when Ben Bernanke first mentioned the idea of reducing the Federal Reserve’s bond buying programme, otherwise known as the “taper tantrum”.
Many bond managers have been wrong-footed by this. Most thought interest rates would have moved up by now in both the UK and the US. Yet five years on and we still have the emergency rate of 0.5 per cent.
Old Mutual Global Strategic Bond Fund manager Stewart Cowley suggests we are finally moving back to an evidence-based investment environment, where participants pay attention to real data, rather than acting on a set of words.
He also argues that Mark Carney’s recent speech, suggesting UK interest rates could rise sooner than markets expect, was in fact far more balanced than you might have read in the paper. It was the press and other market participants that focused on the part on rates rising faster than expected.
What, in fact, Mark Carney was doing was simply stating the obvious – the emergency is over and, at some point, rates will need to rise.
My own opinion is the Bank of England still does not have a view of when this will be. While I believe rates will eventually rise, they are not going to move too much.
Cowley has been caught out a number of times more recently, including having a significant currency exposure to the US dollar which has been weak against sterling. Elsewhere, his general negative outlook on bonds has not served the fund well over the last couple of years.
The fund has been positioned to benefit from rising bond yields and falling prices, though this view is yet to come to fruition. For example, severe weather in the US caused a shock fall in economic growth at the beginning of this year. Bond markets acted accordingly with yields falling, proving painful for the fund.
Cowley, however, views this as a blip and overall is generally positive in his outlook for the US. As such, he maintains his negative outlook for US government bonds and the fund remains positioned to benefit from rising US bond yields. Around a third of the fund is also exposed to the US dollar. The manager expects improving economic data coming out of the US will support a strengthening dollar.
In Europe, the situation is different. The threat of deflation is present, while the introduction of quantitative easing is increasingly likely. He has recently taken profits and sold out of bond positions in Italy meaning the fund has no exposure to Southern Europe. He has, however, maintained a position in German bunds.
One-fifth of the portfolio is invested in corporate bonds, currently focused on the higher-quality, investment grade end of the bond market investing in robust businesses which he believes are capable of servicing their debts. He remains cautious in his outlook for higher-risk, high-yield bonds, believing the low yields on offer are not attractive enough for the level of risk taken.
In conclusion, this fund is designed to perform well in an environment of rising bond yields, namely in the UK and the US, and against a strengthening US dollar. Over the last couple of years, you might have fared better in a more traditional, straightforward corporate bond fund.
As such, I view this fund more as an insurance policy for when things turn sour. Eventually, bond yields will rise alongside interest rates, though it is hard to know exactly what the market fallout will be. Fixed interest might not be the only asset class to suffer; equities may also.
The issue really is much more one of timing and how far the bond setback will be. This is exactly the type of fund that will come into its own spectacularly at certain periods, as it did in 2008. I am certain it will have its day again, I just can’t tell you when.
Mark Dampier is head of research at Hargreaves Lansdown