David and Goliath is one of the bible's best known parables. Its message is still injected into culture today, thousands of years since its telling. It applies to contemporary situations daily, and so too it is applicable to the investment environment.
Often built up to problems of mammoth heights, market events such as interest rate hikes in the US, the devaluation of the yuan and decreasing oil prices could be viewed as unconquerable giants, ready to swallow up investors who dare cross their path. However, this is not always the case.
Just as David found when contending with Goliath, right is often better than might. The nimble Aberdeen Strategic Bond Fund both knows its market and utilises its armoury, excellently positioning itself to battle its very own market giants.
US rate hikes
Fixed income investors are growing increasingly tense as the looming interest rate hikes in the US and the UK appear only to offer plaguescale devastation to the bond market. However, the situation is not nearly as hopeless as it may seem. There is an abundance of regions engaging in monetary easing at the moment. Over fifty countries have cut interest rates this year and with a slower profile of growth for China it seems unlikely there is going to be a need to raise rates aggressively any time soon.
That being said, the US Federal Reserve is likely to start raising rates this year. What we value as more important however is the path taken back to monetary policy normality, wherever the new ‘normal' may be. It is the message that will accompany the first hike that will more significantly impact the market, not the hike itself (which is so vastly feared). Should the next move look to be a long way off, the reaction will be positive for bonds. A more aggressive hiking plan provides more difficulty for investors. We remain prepared for both scenarios. The Aberdeen Strategic Bond Fund handles exposure to interest rate changes through the active management of duration in the Fund. And so, as we approach the first hike in the US, duration will remain under constant review. The Fund is currently aligned with market expectations for a gradual normalisation of policy. Equally, we are equipped for more aggressive hikes by aligning our short-to-medium term asset allocation through the use of derivatives.
Liquidity is drying up
Liquidity is indeed lower than before the global financial crisis. The amount of stock carried by investment banks is estimated to be at 10-20% of pre-crisis levels. What's important is that the market has acclimatised. The impact for large funds, however, is the restricted choice this gives the manager. The Aberdeen Strategic Bond Fund has remained nimble in order to navigate the market and adapt alongside it.
Additionally, being part of a global business we are able to source new opportunities more easily by diversifying into other markets. Our on-the-ground expertise in regions such as the US and Asia has helped us pinpoint where the value is in the wider fixed income area. Furthermore, we aren't constricted by a benchmark which means we are essentially able to ignore disruptive market noise, and are not forced to partake in new issues that don't appear to offer value. This way, we have been able to maintain our focus on the long term and the fundamentals of the sovereigns and companies in which we invest.
Slipping commodity prices
Commodities appear to be at the mercy of unbalanced supply and demand at the moment. Central bank activity and geopolitical dynamics have compromised fundamental analysis. However, companies have been dealing with very low levels of growth for a number of years and have re-positioned their balance sheets to ensure that a continuation of this environment will not lead to stress. Credit remains an attractive investment, and the lower input costs for many industries have meaningfully helped their profit margins.
The Aberdeen Strategic Bond Fund is well positioned to take advantage of any opportunities that arise in commodity-related names. The question is how to pick sound investments in the midst of the carnage in the commodity market. Our focus on quality really helps when investing in corporate bonds. Those companies with financial prudence at the fore and the ability to re-shape their business via the disposal of assets or reduce shareholder distributions signal a strong investment case to us.
Contagion from China
China's economic growth has been slowing for years. The knock-on effects are evident in the country's massive contribution to the global economy - now accounting for more than 15% of global activity and an even higher share of global growth - and investors are (understandably) rattled. Corporate bonds in Asia do not constitute a core part of the Aberdeen Strategic Bond Fund. Our exposure to Asia is on a selective basis. We think opportunities in Asia lie in those markets with little exposure to China. India, for example, currently grounded in reform presents strong investment opportunities.
Australia remains one of the key contagion points from slower Chinese growth. The Aberdeen Strategic Bond Fund currently has a long duration position in the 3 year area of the curve in Australia where growth will also fall and inflation is likely to reduce sharply.
We have also been cautious about approaching Asian sovereign markets - Indonesia remains an interesting long term play but in the short term maybe impacted by slower Chinese growth and indeed yields have headed substantially higher in the local market. Overall, Asian markets are a small part of the Aberdeen Strategic Bond Fund's investment universe. Positions are often opportunistic with the intent of adding value to the Fund's core European, UK and US holdings.
Navigating the fixed income market, and the titanic headwinds it sometimes presents, can be daunting and incredibly tricky. But by being brave enough to stick to your long-term convictions and nimble enough to dodge some of the danger is likely to be key in slaying the Goliath market challenges that lay ahead.
Allocating across all fixed income markets
Watch this short video with the fund managers Roger Webb and Luke Hickmore in which they discuss the characteristics of the fund. The Fund is flexible in its approach and can use the full resources of Aberdeen Asset Management's worldwide team of analysts and fund managers.
The following risk factors should be carefully considered before making an investment decision:
- The value of investments and the income from them can go down as well as up and your clients may get back less than the amount invested.
- Past performance is not a guide to future results.
- Interest Rate Risk: Fluctuations in interest rates are likely to affect the value of the bonds and other fixed-interest securities held by the Fund.
- If long-term interest rates rise, the value of your clients investment is likely to fall.
- Credit Risk: There is a risk that the issuers of bonds may not be able to repay the money they have borrowed nor make any interest payments.
- This risk is greater than average where the Fund invests in a bond with a below investment grade credit rating.
- Currency Risk: The Fund may have holdings which are denominated in different currencies and may be affected by movements in exchange rates. Consequently, the value of the Fund's investment may rise or fall in line with exchange rates. This may also cause the value of any income generated to go up or down.
- Derivatives Risk: Derivative transactions will or may be used to a significant extent. At times, though the use of these instruments could lead to considerable short term fluctuations in price. The impact to the Fund is greater where derivatives are used in an extensive or complex way.
- Further details of the risks relating to investment in this Fund can be found in the Prospectus, which is available on request or at our website aberdeen-asset.com
For more information please contact our Sales Support Team, visit our website at purebredbondfund.co.uk or call 0845 485 3017
For professional investors and financial advisers only - not for use by retail investors.
The Fund is a sub-fund of Aberdeen Investment Funds ICVC, an authorised open-ended investment company (OEIC). The Authorised Corporate Director is Aberdeen Fund Managers Limited. Nothing herein constitutes investment, legal, tax or other advice and is not to be relied upon in making an investment or other decision.
No recommendation is made, positive or otherwise, regarding individual securities mentioned. This is not an invitation to subscribe for shares in the Fund and is by way of information only. Subscriptions will only be received and shares issued on the basis of the current Prospectus, relevant Key Investor Information Document (KIID) and Supplementary Information Document (SID) for the Fund. These can be obtained from Aberdeen Fund Managers Limited, 10 Queen's Terrace, Aberdeen, AB10 1YG.
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom.