The €6.4bn Jupiter Dynamic Bond fund accounted for £4.4bn or 96% of the firm’s £4.6bn net redemptions last year as yield-hungry investors shunned fund manager Ariel Bezalel’s cautious stance.
The bulk of assets are in AAA-rate bonds and govvies make up 52.9% of the portfolio, with US treasuries and Australian sovereign bonds comprising all the top-10 holdings, according to the fund’s latest factsheet.
As such, it had a difficult time beating more risk-heavy peers, Bezalel explained at a breakfast event hosted by Jupiter this month. Dynamic Bond languished around the third and fourth quartile of peers within the Offshore Mutual Fixed Interest Global sector in the six months to 30 June 2018, with Bezalel’s fund returning -2.65% in euro terms versus the sector’s -0.49%.
But performance picked up as volatility hit in Q4 with the fund finishing just outside the top quartile for the year. “Investors have taken that on board and hence we’ve seen a bit of a turnaround in flows,” said Bezalel.
|Jupiter Dynamic Bond||3.24||3.33||3.41||0.98||4.49|
|Offshore Mutual Fixed Interest Global||3.21||3.06||3.76||4.17||2.31|
Source: FE Analytics; total returns in euros
Govvies and high yield telling two different stories
Bezalel said there were “so many signs that we are late cycle” which is why “right now it’s time to be careful”. He pointed to corporate America’s record $9trn debt pile and covenant-lites making up 85% of the leveraged loan market – similar to levels seen right before the global financial crisis.
“There’s been a dichotomy in financial markets in general,” he said. “Risk assets are saying year to date that everything is awesome. But the government bond markets are telling you something completely different.”
While US and European high yield and equity markets have posted solid gains year to date, Japanese government bond yields are on -5 basis points, the German 10-year is sliding to zero and yields on the US 10-year are close to where the were on 3 January “when everyone thought the world was coming to an end,” said Bezalel.
Fallen angels could hit $1trn
He is also worried about the “explosion” in BBB rated bonds in the US investment grade space.
In the previous credit cycle, 23% to 45% of the investment grade market became fallen angels, he said. “If you apply those percentages to the next credit cycle you could have anything from around $500bn to $1.1trn of paper that could fall into high yield. So in the worst case scenario you could see a near doubling of the US high yield market.”
Another big accident waiting to happen is leveraged ETFs, he said.
While Bezalel admitted this isn’t a huge part of the market, he is still concerned by the fact there are $12bn worth of ETFs on leveraged loans “which at the best of times is a very illiquid product”.