Event Voice: Your Questions Answered by Aegon Asset Management

Time to get strategic about bonds

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Event Voice: Your Questions Answered by Aegon Asset Management
  • Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?

The Aegon Strategic Bond fund strives to give exposure to the broader fixed income markets by offering a dynamic blend of global bonds that aim to deliver superior risk adjusted returns through the cycle. The fund utilizes a high conviction and active management style and uses multiple sources of alpha.

Our process utilizes a combination of a top-down asset allocation, combined with bottom-up security selection. It is our job as managers of the strategy to gauge the market outlook and determine whether top-down allocation or security selection will be the main drivers of returns and allocate capital accordingly. 

Our approach starts by evaluating the global macroeconomic environment. The broader team sets their views across the entire fixed income spectrum, including government bonds, credit, and emerging market debt. The co-managers of the strategy then decide how much to allocate to risk free and how much to risky assets. 

Then comes the bottom-up security selection which helps populate the above ‘buckets' of risk. We rely on deep, fundamental credit analysis to build a high-conviction portfolio of best ideas from the bottom up. Supported by a structured top-down process, we embrace a dynamic approach to allocating to regions, ratings and sectors. 

The strategy is team managed, bringing together individuals with diverse perspectives and complementary skillsets. Alexander Pelteshki and Colin Finlayson co manage the strategy. They are supported by a global platform of over 160 investment professionals*, including dedicated rates and credit analysts. 

  • How are you currently positioning your portfolio?

We are long duration across the board. In fact, we have hardly ever been longer interest risk in this portfolio. We are of the view that we have seen the end of the interest rate hiking cycle and expect yields on government bonds to be lower in the next twelve months. 

Within risky assets, we like the yields on both global investment grade as well as global high yield. We do hold a preference for the former, as the economy slows down and credit quality dispersion leads to higher default rates. We expect to see spread decompression, led wider by the lowest quality part of the rating spectrum. Therefore, stock selection will be of utmost importance next year in order to extract these attractive market returns without being overly exposed to rising idiosyncratic risks. 

Overall, we like fixed income markets very much. Starting yields on investment grade and high yield indices are as high as they have been in over a decade, and historically this has been a very good predictor of future total returns. 

  • Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.

We continue to like the credit cycle in southern Europe. The ongoing fiscal and macroeconomic convergence between the core and the periphery continues unabated. On one hand, there is a strong positive credit rating momentum across the Mediterranean. We see sovereigns from Greece to Portugal enjoying strong credit rating upgrade cycles, which positively impacts the financial sector. On the other, the core is already in a recession, with ballooning deficits and bleak near term growth. 

From a bottom-up point of view, we expect to see ongoing compression between peripheral and core banks, in particular 1st tier Greek and Portuguese as well as 2nd tier Spanish vs 1st tier Benelux names.

Top-down, we expect to see curve steepening in government bond markets. As we are transitioning from a hiking to a cutting cycle at some point in the near future, rates curves will look too flat. The difference between the yield on the 30 year and 5 year government bond debt therefore ought to increase in such a scenario, leading to a steeper yield curve. 

*Aegon Asset Management as at 30 September 2023
All data is sourced to Aegon Asset Management unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice.
Aegon Asset Management UK plc is authorised and regulated by the Financial Conduct Authority. 
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