In a world of low interest rates and decidedly low government bond yields, for some the outlook for fixed income appears bleak. But according to Nick Gartside, international chief investment officer for fixed income at JPMorgan Asset Management (JPMAM), there’s life in the old dog yet.
He adds: “There is a very long-run rotation into bonds. I think it goes back to that broader demographic factor of people living longer and able to afford to take less risk with their savings. The clue is in the name fixed income. Its clearly good at providing an income.”
While he is optimistic about the future for the asset class, he reveals it took him a while to find his calling.
He says: “I’d always been interested in markets and when I started work I realised there was more to markets than just equities – and learnt more about bond markets. It’s only once you get into markets you realise that equity markets aren’t actually the most important and aren’t the biggest.”
While fixed income globally is now a force to be reckoned with, Mr Gartside points out: “No one wanted to be a bond manager when I started. They thought they were funny little things that no one understood or, indeed, cared about.”
As a graduate trainee at Mercury Asset Management, his first rotation was in emerging market equities, “which I really didn’t like,” he adds.
Finding the focus as an equity manager to be very narrow, he recalls: “I did think I’d made a mistake. But I remember the HR person said you should chat to the bond team, which I did with some reluctance.
“[But] then I just thought bonds were amazing. If you think about the drivers of bonds, it’s much more interesting things. It’s the interplay between general economics and politics: the kind of things you’d read in many newspapers will move bond markets and have an implication on growth and inflation. I thought that was just significantly more interesting than looking at a very narrow part of the [equity] market.”
During his five years in the bond team at Mercury, Mr Gartside experienced the first of many changes in the fixed income market.
He says: “You saw the development of corporate bonds in Europe, which are now very commonplace, but weren’t before. The role broadened from doing just government bonds to doing aggregate bonds. Then at Schroders there was the opportunity to broaden that role and do global fixed income markets.”
Mr Gartside joined JPMAM in 2010 in the wake of the financial crisis and credit crunch, with the manager highlighting the latter as one of the biggest challenges of recent years.
“Bond markets were at the heart of that, as ultimately it was a situation where the build-up of debt got too big. And bits of the bond market got too big, and bits of the bond market got too complacent,” he says.
As a result he suggests the crisis reinforced the idea that bond investors are money lenders. “Whereas equity investors are investing for a share of future profits, a bond investor is lending someone’s money, so you have to look at that investment very differently and focus on the ability of that entity to repay you.”
He suggests there is now a clearer idea that “not all bonds are equal”.
“You need lots of people to research credit and get their hands dirty,” he says. “That’s magnified just because of the sheer size of bond markets. They are big; they are about two-and-a-half times the size of equity markets. There’s no doubt in bits of the market there will be complacency, but the way you guard against that is this idea of getting your hands dirty and having people that do the credit work.”
While fixed income has had a remarkable run, there remain opportunities, with Mr Gartside highlighting the growth of bond markets as both good and bad. He notes some risks have been magnified by central banks’ action, with zero interest rates resulting in many negatively yielding bonds, leading to a shift in the way investors are accessing the larger bond universe.
He says: “When I first started, investors bought a bond benchmark – a bond fund married to a benchmark – and it worked pretty well. Today in many cases you could argue that bond benchmarks have a heck of a lot of risk embedded in them because the benchmark will contain many negatively yielding bonds.”
This has led to the creation of unconstrained, strategic or benchmark-unaware bond strategies. In turn, this has prompted a change in Mr Gartside’s investment process.
He says: “At one time everything was relative to a benchmark. You can think of that as sort of one dimensional investing. These days the portfolios I manage with others internally are those that don’t have benchmarks. You can think of those as being multidimensional.
“We want to get the best ideas; we don’t really care where they’re from as long as they’re good ideas. Obviously those ideas change – yields change as the fundamental factors change. Credits may get better or worse, and when that happens we’ll rotate the portfolio so it can look quite different from quarter to quarter.”
It may sound like a tricky task to overhaul a portfolio, especially those with a global focus. The CIO explains: “What you need for approaches like that is ideas. We have those ideas from a big team. If you think of bond markets in dollar terms, it’s about $100trn [£78trn] and it’s a very global market. We have about 200 people at the coalface researching bond markets and they do a lot of the day-to-day work in making a judgement on the underlying borrower.
“If you’ve got that [resource] you can shift portfolios and we do, fairly dramatically. If you don’t have that, what you find with an unconstrained or benchmark-unaware strategy is you have a permanent style bias that reflects your own inherent bias and then clearly it’s not global best ideas. It can’t be.”
He points out there is currently value in certain bonds and not others, with the reflation theme playing a key role. High-yield bonds and emerging markets are potential beneficiaries as default rates could fall further still, he contends.
He says: “What emerging markets really need is a better global growth environment, and they certainly have that at the moment. Our view is that capital is always attracted to where it gets the highest real return, and with the better global backdrop that’s likely to be emerging markets as opposed to developed markets. They should continue to attract that capital and their currencies would benefit from that.
“With our open-frame portfolios, a lot of our risk is in those reflation themes, those bonds that we think will do well. But again its back to this idea of not all bonds being equal.”
Looking ahead he suggests bond markets are very adaptable and while strategic or unconstrained bond funds will be part of the future, “they’re clearly not the sole thing”.
He says: “If strategic bonds do their job properly, they are something that should be able to reinvent themselves. You’ve got something that is flexible, unconstrained, can do pretty much what it wants, so it should be able to adapt for unfolding environments. It will be an interesting question in four or five years when economies look very different to now, the degree to which strategic bond funds have adapted and changed.
“We’re full service. We start from a good place as we’ve got a lot of resource – that’s key in bond markets. We’ve got a good footprint of people in different countries, and that’s important with the rise of emerging markets. One of the keys with bond markets is they seem to change a lot, maybe in a way other markets don’t. With fixed income, you have to keep at the forefront of that market innovation, and its one of the things that we try to work hard on.”
CV
Nick Gartside
2010 – Present
International chief investment officer of fixed income, JPMorgan Asset Management
2002 – 2010
Head of global fixed income, Schroder Investment Management
1997 – 2002
Fund manager, Mercury Asset Management/Merrill Lynch Investment Managers
