Illusions, Herds and a Donald Trump ‘Trisk’
Royal London Asset Management discuss fixed interest investing during volatile markets
14 March 2016
With market volatility and investor uncertainty continuing, what is the outlook for fixed interest investing? Royal London Asset Management’s fixed income team shares its views following a roundtable event last week.
A herd mentality?
Jonathan Platt, Head of Fixed Interest at RLAM, explained the increasing herd mentality that is being seen in credit markets, with an abundance of investors looking to target the same pool of assets. A preoccupation with benchmarks has become apparent, yet RLAM continues to be more nimble and trawl deeper into credit markets. He said: “When we look at credit investments, we look at getting closer to the assets of the issuer. We prefer security to the transitory, even illusory, nature of liquidity. RLAM is not a slave to ratings; we add further analysis.”
Value in credit
Paola Binns, Senior Credit Fund Manager at RLAM, described the strong value picking opportunities that have resulted from the dramatic change in the pricing of corporate bonds. She said: “When dealing with banks in illiquid markets, you can become a price maker as opposed to a price taker.”
The 7% yield recently offered by Prudential’s lower Tier II bond recently provides an example of trends in the wider market. Concerns sparked genuine selling and retail funds suffered outflows as a result. As RLAM has seen net inflows into funds, the team is able to take advantage of conditions and buy such bonds at a price providing significant yield for what would be considered a fundamentally strong company. Banks are finding it much harder to shift bonds due to illiquid credit markets. Their balance sheets have shrunk post 2008 and the cost of holding capital has increased.
Are government bond markets broken?
Craig Inches, Head of Short Rates and Cash at RLAM, remarked that in government markets volatility has driven investors to seek a return of capital, as opposed to a return on capital. This increase in demand has led to anomalies in traditional wisdom. He said, “Government bond markets are broken to a certain degree. Investment banks cannot warehouse risk, so if we sell a bond to them then they are immediately looking to offload this risk to someone else.”
Trump Risk - ‘Trisk’
Azhar Hussain, Head of Global High Yield at RLAM, emphasises the need to acknowledge the threat of ‘Trisk’, the risk of Donald Trump winning the US election. He says, “High yield is very much a stock picker’s market. If you pick your investments and don’t slavishly follow benchmarks, you can get a very good yield. The threat of ‘Trisk’ in the upcoming US election is being majorly underplayed. The Republican fiscal stance is horrific and the economic implications should be considered.”
Where do we go from here?
Craig Inches, Head of Short Rates & Cash at RLAM, said, “We’re often asked what the catalyst will be that brings government bond yields back to ‘normal’ levels. The only catalyst is time. In six months’ time when oil isn’t at $10 a barrel and China hasn’t collapsed we will notice that longer term global growth has continued. It is then that we will slowly but surely see a return to ‘normality’ in bond markets.”
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About Royal London Asset Management (RLAM):
Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.
RLAM manages over £84.5billion of assets and employs 75 investment professionals. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with Group funds under management of £84.5 billion. Group businesses provide around 9.1 million policies and employ 2,988 people. (Figures quoted are as at 31 December 2015).