Mike Riddell and Kacper Brzezniak of the Allianz Strategic Bond Fund tell us about their approach
With the world economy facing a long and bumpy journey, how does the investment team turn fast-evolving macro views into strategy? "Two things are fundamental: what's our macro view, but also what's priced in," says Allianz Global Investors' Mike Riddell, who tracks a huge range of indicators from options markets to metals prices and money supply growth. "Particularly, is the market pricing in a sufficiently broad range of outcomes?"
"At the very beginning of 2020, we were actually quite bullish on the global economy but still weren't overweight credit. Why? Not because we foresaw coronavirus. It was because credit was pricing in perfection in an imperfect world," he says.
Co-manager Kacper Brzezniak picks up the story: "If and when coronavirus dissipates, there'll be something else - continuing recession fears, other geopolitical factors." The aim of the team is to build a portfolio that incorporates some of those possibilities.
Relative reasoning
"We had a quarter of the fund in high yield corporate bonds at one point, in summer 2016," says Riddell, making clear that the team can buy corporate bonds if it wants to. "But for some time up until March 2020 we had been outright short in vulnerable areas such as high-yield US corporate bonds."
That's not because the team try to predict market pricing. "People ask us, where do you think 10-year yields will be in a year; we say we don't know. That's the reality. We think about relative, not absolute, yields."
In fact, Riddell says this March the team took advantage of the cheapest credit valuations in a decade to switch the portfolio around from being near 100% in very high-quality government bonds going into the corona crisis - plus various derivative overlays - to having half the fund in longer-dated investment grade corporate bonds.
Going global
As this suggests, when the timing is right, the team can go more ‘risk-on' in various global markets. "As another example, last year Italy was blowing up and seemed cheap on many metrics. We've had occasions where Chinese real estate seemed cheap," says Brzezniak.
But the team say they don't usually expect to remain ‘risk on' for long or to position the portfolio so that it is highly correlated with equities, or they might fail in their longer-term correlation objective.
"Mostly over the last three years, we have been more defensive," Brzezniak says, "because we were factoring in a rise in volatility." That sea change has arrived and is revealing hidden rocks in many markets.
"We can take yield curve views, currency views, inflation views, across any market in the world," says Riddell, and the liquidity of the fund means the team can move in and out of positions very fast. Over the next few years, they will be making the most of their unusually flexible mandate.
Click here to read how the team pursue the three key objectives of the Allianz Strategic Bond Fund
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