“Bigger funds can do asset allocation alpha, interest rate management of duration alpha but typically not stock selection alpha. But in this lower-yield environment, stock selection is a bigger driver of alpha, compared with the other components, and a very useful source of return, even for an investment-grade portfolio.
“It can also help you avoid some of the bad names. In 2015, Volkswagen and Glencore blew up. Investment grade typically doesn’t have many credit blow-ups but Volkswagen had horrendous issues even with their investment-grade bonds. We didn’t own that. We only own what we call our ‘best ideas’ and Volkswagen certainly wasn’t one of those.”
How low can you go?
Another theme Bowie has been exploring across his portfolios is low-duration, or at least as low as his mandate allows him to take it.
“We still think duration is an under-rewarded risk, meaning we’ve got as little duration as we can in our portfolios. The portfolios I manage tend to have higher-duration benchmarks than the other funds at TwentyFour AM. The corporate benchmark I’m measured against has a duration of over eight and my fund’s duration is two years lower than that at six and a half.
On the other hand, Bowie feels he is properly rewarded for taking credit risk, particularly in the era of president Donald Trump.
“Trump’s rhetoric so far has been pro-growth. In the absence of inflation, that’s a very good thing. If we have a situation where he cuts corporation tax and you see many companies repatriating capital back to the US, that could be a massive positive for the US economy. That type of environment would be very good for corporate bonds but perhaps not so good for government bonds.”
Assuming credit risk is a better way of navigating medium-term risks such as rising government bond yields, he says: “Since Brexit, 10-year gilts hit 1.5% and are trading at 1.34% today. But I still think they will get up closer to 2% by the end of 2017.
“My hope is the UK economy is growing strongly enough that we see an improvement in nominal growth and yields rise even higher than that, possibly toward 3% for 10-year gilts.”
