Strategic bond funds reduce risk in 2019

Managers of some of the largest funds in the Investment Association (IA) Sterling Strategic Bond sector have been moving out of riskier high-yield and emerging market assets throughout the year.

They have been rotating towards government bonds in both the US and UK, or upping the quality of investment grade corporates they lend to.

The move comes as trade tensions continue to ratchet up, the global economy keeps slowing and Brexit uncertainty grows. Evidence suggests investors running global equity mandates have become more defensive in their positioning, too.

Meanwhile, UBS Wealth Management recently cut its exposure to global equities to underweight for the first time since 2012's Eurozone crisis. Other multi-asset experts have told Investment Week they are doing similar.

Fund managers slash exposure to global equities on trade war fears

Bond markets have already seen a significant move, with the stock of negative-yielding debt in the system now approaching $17trn. Across Europe and in Japan, yields on sovereign bonds have been forced to or below zero.

Even US Treasury bonds have seen steep falls in their yields, with the benchmark 10-year sinking from 3.24% in August 2018 to 1.47% by 4 September as markets price in further interest rates cuts.

"Risks are high, prices are high and investors are twitchy," said Bryn Jones, manager of the Rathbone Strategic Bond fund. "That's why we're being careful about the risks we take and the prices we pay for bonds of all stripes."

Reducing risk

Ariel Bezalel, manager of the Jupiter Strategic Bond fund, said he'd been of the view for a while "that the US economy is nearing the end if its cycle and is getting ever-closer to the next recession". "We expect to see further aggressive easing from central banks, more than is currently priced in by markets," he predicted.

Further, Alex Pelteshki, co-manager of the Kames Strategic Bond fund, thinks the US and China's trade relationship will get worse before it gets better. He noted China's retaliation to recent US tariffs was "particularly concerning".

"Our core view now is that it will be increasingly difficult to walk back from the latest round of escalations on their own, let alone a comprehensive trade agreement," explained Pelteshki.

Neil Birrell: Investors' challenges go beyond bond markets

Even Baillie Gifford, which prides itself on long-term thinking, has been watching the trade tensions. Torcail Stewart, who runs the firm's Strategic Bond fund, said he's been considering the impact it could have on risk management.

Stewart said: "Progressively, we have been reducing risk within the fund through 2019, focusing upon our best corporate bond ideas, those where we envisage balance sheet improvement, plus keeping an increasing amount of powder dry, in highly rated businesses.

"Why we are cautious, relates to the historic track record of US rate hiking cycles resulting in recession, combined with high global debt levels and, until recently, central bank balance sheet unwind. Our main concern for 2019 is that the present trade war, creates a level of uncertainty that goes too far and tips the business cycle over."

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• Topics
• Bonds
• Strategic bonds
• Government bonds
• Jupiter Strategic Bond
• Bonds
• High Yield Bond
• high yield bonds
• Ariel Bezalel
• Wolfgang Bauer