Firing lineOct 12 2021

Walker Crips CIO: The market is wrong about government bonds

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Walker Crips CIO: The market is wrong about government bonds

The title of chief investment officer probably means different things in each of the businesses where it is deployed, but Chris Darbyshire, chief investment officer at Walker Crips Investment Management, says the role is changing and the likelihood is the next generation of holders of the title will have much more similar backgrounds.

He says: “CIOs are required now to be more mathematical, it is much more about statistics. Firms are trying to gain an edge through strategic asset allocation, and that requires use of stats and the understanding and measuring of risk.” 

Darbyshire’s background is in the maths-driven world of derivatives investing, specifically structured products, and he worked for large institutions on those products before becoming chief investment officer at 7IM and then at Walker Crips, where he oversees around £3bn of assets under management, including in the companies model portfolio range. 

He actually began his working life as a journalist, at Euromoney, but decided to leave after a year. Darbyshire says: “When I told them I was going to leave, I was called into the boss's office, and when it became apparent that they couldn't persuade me to stay, the chap said to me ‘derivatives’, and that is what I ended up doing.” 

After spells working in corporate finance, he worked on the structured products and derivatives desks at BNP Paribas and Goldman Sachs. 

He says now, “since the global financial crisis, the structured product market has changed a lot and has become a lot less interesting, with far more plain vanilla products coming to the market”.

Many structured products struggled to perform during the global financial crisis as liquidity dried up, and also because Lehman Brothers – one of the largest financial institutions to act as counterparty in the structured product market – went bankrupt. 

Darbyshire joined Walker Crips following a six-year spell as chief investment officer at 7IM.

He says the main difference between the first is that 7IM “was more institutional in its mindset, and I arrived there having always worked on the institutional side. Whereas at Walker Crips, the investment management side is with advisers and private clients, so there is more of a retail focus, as there should be. That is probably the number one thing I am learning at Walker Crips; how to be more retail-oriented”. 

The model portfolio service is a relatively small part of the AUM of the business, with investment managers creating bespoke portfolios for individual clients being the bulk of the business. 

Darbyshire’s role is to provide research and thought leadership to those individual investment managers, as well as running the model portfolios.

He says that while much is changing in the world of investment management, one of the things that remains broadly the same is the significance of the role of government bonds in portfolios.

Such assets are typically held in portfolios as a way to mitigate the risks of a sell-off in equity markets. 

In the decade since the global financial crisis, the policy of quantitative easing pursued by central banks has caused the price of government bonds to rise to record levels, and consequently for yields to fall. 

Equity markets

Darbyshire says there has also been an impact on equity markets. 

“At the moment financial markets hate government bonds and love equities. They love equities because they believe that central bank policies will continue to cause them to rise, and the saying goes that ‘you should never fight the Fed’. But that lacks logic for me, because what the central banks are actually doing is buying the bonds, not the equities.

"The Federal Reserve in the US is buying $80bn a month of government bonds, and while they won’t mind that this is helping the equity markets, if push comes to shove, then central bankers would let the equity market fall, rather than the bond market. That’s why it makes no sense for investors to hate the bonds and like the equities.”

The particular part of the equity markets that has benefited most from the rise in bond prices is the segment known as bond proxies, examples of these types of stocks include Unilever and Diageo. 

Because the dividend income from those stocks is regarded as being almost as safe as a bond income, lower yields on bonds increases the attractiveness of the income from those equities.

Those equities broadly fit into the 'growth stocks' category. Equities that habitually do better when bond yields are rising are called 'value stocks', and those have underperformed for most of the past decade.

Darbyshire says it would be foolish to write-off the long-term prospects for value stocks.

He says: “One of the challenges we have faced over the past few years is that technology growth stocks have performed very well, and that means a client ends up with a big weighting to those, and that generally means a big weighting to the US equity market by default.

"This is something we are trying to monitor now, as we don’t want clients to be too exposed. While valuation-based investing has not worked for the past decade, when you get the absolute explosion in prices of some growth stocks, that can unwind, with the result that value would then perform better.”

The overall positioning of his portfolios is to be neutral on bonds, and underweight on equities, while holding slightly more cash than usual. 

Darbyshire says he has grown “lukewarm” on UK equities as he fears another wave of the pandemic will happen, and that the level of government support that happened when the pandemic first struck may not be repeated. 

The composition of the UK stock market means that an investor in it would typically have more value, than growth stocks. 

He says the business has had a “good run with the UK equities trade, but now we are more cautious”.

The business's wealth management unit is based in York, while Darbyshire is in London. He says the experience of working with retail clients offers him the chance to “expand my skill set”.

Having been a journalist, equity analyst, financial controller, corporate financier, and derivatives trader, the road to Walker Crips has required Darbyshire to use a huge range of different skills. 

With markets gripped by such radical uncertainty, the diversity of that experience could prove essential in the years to come.

David Thorpe is special projects editor at FTAdviser