is alpha generating fixed income

Not convinced by equity rallies but sick of low-yielding bonds? In the absence of a 'great rotation' a third option could appeal – anyone for alpha-generating fixed income?

is alpha generating fixed income


The truth of the matter is, there is no great rotation, and there is unlikely to be one in the near future.

Latest fund flow figures support this statement. Yes equity fund sales have increased, €20.8bn flowed into cross-border equity funds in January (the first time sales have topped €20bn since December 2010), according to Lipper data.

But bond sales have not slowed. In fact the same Lipper figures show fixed income flows were stable in the first month of the year at €23.7bn, just above the seven-month average sales figure for the asset class (€23.2bn).

In a piece featured on Portfolio Adviser earlier this week, Lombard Odier’s investment team argued there could not be a great rotation, because by definition when somebody sells something somebody else buys it.

But even in its simplest form, greater appetite for investing in equities and less desire to invest in fixed income will only become apparent on a grand scale when institutional investors exhibit such behaviour.

‘Little rotation’

This is still a number of years off, according to David Hambridge, director of multi-asset funds and until then, if anything, we are in a ‘little rotation’.

That is not to say that on the asset management side of the business the fund houses traditionally associated with strong equity offerings will not be rubbing their hands together as the stock markets put in strong rallies.

Jupiter and Schroders have fallen behind firms like M&G and Invesco Perpetual in terms of inflows in recent times partly because they are not viewed as strong fixed income houses. If flows into equities do pick up markedly Jupiter’s respected European and UK equity products and Schroders’ alpha range, Asia products and stalwarts like Richard Buxton in the UK are bound to benefit.

But Schroders is not resting on its laurels. Phillipe Lespinard, the firm’s CIO of fixed income, freely admits it has been a "second-tier player" when it comes to bond propositions. Now, he adds, Schroders is equipped to become a first-tier player.

In the past three years the asset manager has brought in five new fixed income heads: Lespinard, head of global macro Bob Jolly, Rajeev de Mello – head of Asian bonds, Jim Barrineau on the relative side of EMD and finally Patrick Vogel as head of European credit.

On top of this it has bolstered the fixed interest team with six senior portfolio managers across the piece.

High alpha bond strategies

The cross-section of these appointments paints a unit that is very deliberately focused on the higher alpha sections of the fixed income sphere. As Jolly points out, the returns from benchmark-oriented, beta-hugging strategies might have done investors well during the 30-year bond bull market, but now it is a different kettle of fish all together.

The new funds launched by Schroders to utilise its new talent reflect this – a Strategic Bond Fund for Gareth Isaac formerly of GLG and launched last year, a Global Macro Bond Fund managed by Jolly and unveiled in October 2012, and a Global Unconstrained Bond Fund pipped for launch in April and looked after by both Jolly and Isaac.

“Benchmark strategies have been the bread and butter of the world for the past 30 years. In a raging bull market you do not really worry about the alpha because the beta is giving you enough,” Jolly says.

That is no longer the case, he continues, so the emphasis should be on unconstrained benchmark strategies or Libor plus strategies.

“Markets are essentially manic depressives, they go from happy as Larry to miserable as sin,” Jolly explains, so it is essential to be able to take advantage of the opportunities created by volatility.

Outside view

So should you invest in these higher alpha fixed income strategies?

Hambridge says he can see what Schroders is trying to achieve: “They are known as an equity house and they are essentially saying ‘do not go with your traditional fixed income manager leave them because yields do not do it these days. Come to us because the opportunity cost for coming to us is so much lower now’.

“You are swapping the interest rate risk for manager risk, with more active and alpha plays. I would still diversify across these managers but they are right in that proper strategic managers do not chuck money between investment grade and high yield because they are both expensive. They will use other tools and include some currency management as well.

“They have got a good man in Bob Jolly that is for sure,” he concluded.

Would you look to higher risk and more strategic bond mandates above allocating more to equities? Use the comments box below to let us know…


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