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FA: Why should investors consider fixed income in today’s market? What is the outlook for the sector?
Roger Webb: The returns outlook is not as attractive as it has been in recent years (relative to historic returns from fixed income) and going forward, returns are unlikely to be as interesting. However, generally, I still believe investors can anticipate positive returns from fixed income assets over time. I remain convinced that the “big risk” everyone is worried about - higher yields as a result of policy rates rising - is not something we have to be unduly concerned about in the short term. I believe that policy makers will continue to operate with a view to keeping a lid on volatility in financial markets.
We are likely to see higher yields over time for government bonds and tighter credit spreads in investment grade and high yield markets. However, I don’t think either of those elements are going to be in a straight line. We are going to see moments of volatility when market participants become less certain that policy makers have got their hands on the tiller; moments of uncertainty driven by the fact that everyone is long credit risk and risk assets and are worried that markets are about to reverse; and with liquidity being as bad as it is in most credit markets, pockets of volatility emerging as people start to panic.
FA: Why should advisers consider a strategic bond fund for their clients? What can this type of vehicle offer in these economic conditions?
RW: Strategic bond funds are well suited to this environment. I believe strategic bond funds are well-placed to deal with this volatility and exploit opportunities in the market as they present themselves. With a fund like the Aberdeen Strategic Bond Fund, which is benchmark free and therefore does not have a fixed allocation to any specific asset class, we can hedge out those risks as and when we see them on the horizon. It can take risk down quite quickly and efficiently. As a result, I think strategic bond funds can continue to add value to clients’ portfolios.
Although we may see clients reducing their allocation to fixed income, they are all cognisant of the fact that they have to have fixed income in their portfolios for a number of reasons, but primarily to manage the volatility of the portfolio and generate income. That is an ongoing trend. While there may be some allocation away from fixed income, to equities for instance, fixed income still has a place for clients.
FA: Which features characterise the Aberdeen Strategic Bond Fund? What sets it apart from its peers in the sector?
RW: The fact that it is benchmark agnostic and, therefore, can invest very freely is very important to us and is a crucial differentiator for this fund. Single asset class funds are likely to come unstuck over time because they do have constant and consistent exposure to asset classes that might for nine years out of 10 be doing exactly what they are supposed to do, but then in that other year provide negative returns just because the asset class is having problems. The beauty of strategic bond funds such as our fund is that they can avoid that situation.
We also benefit hugely from being part of Aberdeen Asset Management which is a global house, with a global capability to match. We are able to invest across bond markets, although we tend to focus on our natural markets, which are pan-European fixed income. We can also use the US investment grade and high yield markets, which are clearly massive and significant contributors to funds such as this. Aberdeen also has a fantastic capability in the emerging markets and we can access those as well as global developed markets with this fund.
FA: Do you use any other tools to amplify the “strategic” nature of the fund?
RW: First, it is important to say that, unlike some other funds, this fund is exactly how we set it out to be, which is as a pure bond fund. It currently has no equity exposure but has 100 percent exposure to bond markets, whether that is emerging markets, high yield, investment grade or sovereign markets. We do not incorporate equities to tilt the risk dials, which some other funds do.
The other feature which separates us from our peers is derivatives – and we use them quite actively. We believe that, in the environment we are facing now, and are likely to face in the future, we are going to need to be nimble and flexible. We want to have all the tools available at our disposal, including derivatives and cash markets to enable us to move in and out of positions as we see fit.
Overriding everything is the view that our clients are looking to not only generate strong positive total returns in good market conditions, but they are looking to us to preserve capital when markets are not quite as strong. Those tools are there to help as protect capital for our clients and avoid those big downdrafts in markets and resulting drawdowns in funds.
FA: The fund used to be a part of Scottish Widows Investment Partnership (SWIP) before it was taken over by Aberdeen Asset Management last year. How has it been integrated into the wider Aberdeen proposition and how has the management of it changed, if at all?
RW: It has been a positive experience all round. Aberdeen has always been a very strong investment house. It has always been known as a global equity outfit and an emerging market specialist. What SWIP has brought to Aberdeen is significant fixed income assets, a significant fixed income client base, as well as property capability. Because of that we like to think we have been embraced. In turn, we have embraced the fact that we have a huge resource and skill set around us, whether that is in emerging market equities or global bonds. There is a lot more experience and skills that we can tap into to help us with our investment decisions. At the previous institution we could not invest in as wide a range of markets as we only like to invest in assets that we understand and in businesses that we have as strong grasp on. Aberdeen gives us greater depth in that respect.
One of the key things is, as an equity house, Aberdeen has always been dedicated to stock picking and long term investing. Strategic bond investing fits in nicely with that because it is as much about the top down asset allocation as it is getting the stocks right. We have brought in what we consider to be decent asset allocation skills and the ability to catch the right markets when conditions in those markets are changing. We combine that with the very strong stock selection capability that we and Aberdeen have always had. The result is a strong product that has the chance to be very successful.
FA: How do you and co-manager, Luke Hickmore, work to put together the fund? How do ideas get filtered through?
RW: We do not think of how much we are looking to put in each asset class. Instead, we think about themes that we believe are going to drive global markets and then look at how they are going to impact upon the areas we can invest in. Rather than asset allocating into, for example, high yield or investment grade credit, we look at the themes that are going to drive all our markets and then establish which are the best areas to exploit those themes.
For example, at the moment, we see quite different growth outlooks for the US and the UK to Japan and Europe, where you have policy easing in the latter, as well as many other countries in the world. We are most worried about the US starting to tighten monetary policy later this year. The influence of that might be that high yield and risk assets in the US are less attractive than equivalents in Europe. We think, however, that default rates are likely to remain low and the broad outlook is constructive. In Europe, the area that is set to benefit if the European Central Bank does look to buy back bonds is investment grade credit, but we also think that the feed down into high yield is very quick and much quicker than the market tends to anticipate. High yield is, therefore, a marginally more attractive asset class than investment grade over the short to medium term.
FA: What is the current positioning of the fund?
RW: We currently have approximately 55 per cent in investment grade and 35 per cent in high yield, with the balance in sovereign markets, namely Australia, the US and Germany. We have a relatively large duration position of approximately 5 years which is based on our view that, while yields will move higher, it is not going to happen very quickly and, in fact, we are likely to see lower yields beforehand.
On the more tactical and strategic side of the fund, we have a position where we are short the euro versus the US dollar, which is a consensus trade but something we have a lot of confidence in. This type of trade means the rest of the portfolio does not have to work as hard in generating returns. Meanwhile, whilst we do not have much emerging market exposure at the moment, I think it will play an increasing part in the fund over time. Generally, credit continues to add value and will be a main driver of performance moving forward.
Overall, while conditions may be more difficult than we have seen recently, opting for a strategic bond fund puts investors in the best position to be able to maximise performance, while retaining that all important income stream. The Aberdeen Strategic Bond Fund has the potential to be able to perform well over time.
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.
To access the key features and information on the fund, including specific investment risks, visit purebredbondfund.co.uk.
