Fixed IncomeJun 30 2016

JPM’s Gartside favours ‘low-growth’ bonds

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JPM’s Gartside favours ‘low-growth’ bonds

JPMorgan Asset Management’s Nick Gartside has taken a liking to bonds from developed countries with poor growth prospects, buying government debt from Australia, Canada and New Zealand.

The fixed income chief investment officer said developed markets – with their low-growth and low-inflation outlooks – were a “sweet spot” for bond investors.

Under the banner of ‘high quality, high yield and high duration’, the £1bn-plus Global Bond Opportunities strategy has been adding government bonds from the three countries, with yields between 1 and 2.5 per cent. For high yield, Mr Gartside likes Europe and the US ex-energy. We think the standout markets in terms of government bonds [are] Australia, Canada and New Zealand but, outside those, the [other] standout market is probably the US.”

Mr Gartside has also increased exposure to US Treasuries, a move the manager admitted had puzzled his colleagues from the US. “It always surprises our American colleagues when we tell them that US Treasuries are high-yielding markets, but if you were to rank every government bond in the world from the highest yield at the top to the lowest yield at the bottom, 85 per cent yield less than a 10-year Treasury.”

Mr Gartside said global quantitative easing programmes had attempted to stimulate some low-growth and low-inflation markets, but noted the moves had only prevented recessions rather than forcing central banks to raise rates – a bond investor’s nemesis.

“When you look at fixed income, you’re in the sweet spot,” he said. “You’ve got a level of growth, let’s say enough that prevents a recession over 12 months but not enough that’s going to force central banks to meaningfully increase interest rates.”

Mr Gartside has also been positive on European high yield for some time, a stance that has not changed since the European Central Bank’s corporate bond buying programme, which began this month.

“The ECB actions reinforce the case [for European high yield]. The ECB will only buy investment-grade bonds as long as they’re from one agency.

“But you do get a knock-on effect and that’s powerful because, if you’re in Europe, you’re sitting on minus 40 on your cash, you’re faced with about 40 per cent of government bonds with a negative yield, and you’re then faced with investment-grade bonds where the yield is less than 1 per cent.

“You can see that investor is reaching for yield. Again, if you’ve got corporate health factors which are supportive, we think that’s realistic and they should do that. So that should be supportive, when you look at European high yield.”

On the hunt for quality, Mr Gartside has chosen selected corporate bonds, particularly long-dated bonds from the US where valuations are pleasing.

“If we’re finding corporates that have long duration or long maturities – 20 or 30 years – you’ve got yields there around 5 per cent for industrial companies. We think that’s attractive.”

The manager has increased duration by almost two years over the past 12 months and is now “reasonably long” at five years.

Despite gilts being one of the best-performing assets year to date, the portfolio does not have any exposure. Mr Gartside said there was duration in other markets with a similar quality but better yield.

The JPMorgan Global Bond Opportunities fund has returned 1 per cent over one year, while the IA Sterling Strategic Bond sector returned 2.2 per cent over the same period, according to FE Analytics.