GC: What now for fixed income?
BT: When you are looking at bonds it comes down to what your objectives are. Take my pension pot, with a growth focus and long-term horizon. There are no bonds in it at all despite me being our [Ravenscroft] bond man. On the other hand, if you have a two or three-year horizon, if income is really important to you, the fundamentals of bonds have not really changed.
The risk/reward profile of fixed-income securities offers you a fixed return versus a more variable return on other asset classes, and this means they still have properties such as being more defensive when people get worried about the future.
They also pay most of their return in terms of current income, so I feel strongly there are still places for them. But there are definitely risks. A German 30-year bond at 0% yield or thereabouts looks horrific.
SM: You do not want to earn beta in the bond market and do not really want to own the market, but strategic bond funds have done very well since the market peaked.
It seems to me, you have got to go a little bit off the beaten path. We invest in a fund that focuses on mortgage-backed securities in the US. You have got no duration, you have got floating rates and asset backing, which tick all the boxes for what most of us want out of a bond investment.
DHR: That is an excellent example of what you have to do in the bond space. You have to be clever. The days of buying standard investment grade are over for a while.
GW: There has also been a rise in the nuber of strategic bond managers using mortgage-backed securities.
GC: Are you simply changing the make-up within your fixed-income allocation?
GW: There is always a place for fixed income in portfolios and my investment committee is telling me they do not want to decrease their fixed-income allocation substantially.
Our chief investment officer does not like strategic bond funds, whereas we are fans of them. He thinks we should allocate between the different asset classes ourselves. We would prefer to outsource it to the experts.
