Bond manager Altius Asset Management warns that investors can’t expect the historically low bond yields from last year to continue and should prepare for a turn in the economic cycle which could lead to poor returns in conventional bond portfolios.
Bill Bovingdon, chief investment officer of Altius, says that investors should therefore position their portfolio in order to manage the scenario of bond yields returning to a more normal level.
“As bond yields start to normalise, investors who aren’t taking an active approach, and who aren’t focussing on absolute return, will suffer,” Mr Bovingdon said.
Don Stammer, who sits on the Altius investment advisory committee, agrees and says he believes that developed economies will start to perform much better in 2013, potentially outperforming the Australian economy.
“We have been the ‘glamour’ economy of the developed world over the last few years, thanks to our performance during the global financial crisis, but there is a chance that we will become the laggard this year,” Dr Stammer said.
Mr Bovingdon says that Altius is becoming more convinced about the strength of global economic growth, particularly in the US.
“We are therefore positioning our own portfolio to reduce the level of duration, and instead consider more exposure to opportunities such as short dated credit.
“Duration remains an important component of the portfolio, as it provides protection in the event of a financial shock, but as it becomes less likely this shock will eventuate, we are starting to move into other investment opportunities,” he said.
“The performance of the US economy and its monetary policy will also have a significant impact on Australian bonds.
“The US is still very influential on the Australian market, so if interest rates rise there, then all things being equal, we’d expect to see higher interest rates here, which will impact Australian bond yields.
“The Reserve Bank of Australia will need to remain actively engaged in managing the official interest rate, and this will create an interesting dynamic for bond investors.
“On one hand, rates at the short end are anchored down and could potentially fall further, but at the long end they will be under pressure from rising US rates. We will be looking to actively manage this dynamic.
“So with the US economy well on the road to recovery, and Chinese policy makers effectively avoiding a hard landing, it is really Europe that remains the main risk to global growth.
“The recent events in Italy and the outcome of its election are a timely reminder that the danger in Europe has not gone away.
“Europe is likely to remain weak at best, and there is still the potential for a shock there to have a major impact on global economies.
“Nonetheless, we remain optimistic about the prospect for global growth and the opportunities for active, absolute return bond investors,” Mr Bovingdon said.
Dr Stammer added that US is likely do better than the predicted 2.25 percent growth in 2013 and this figure will be updated during the course of the year.
“In addition, employment numbers will almost certainly be better than people are expecting.
“There has been a great deal of scepticism about the effectiveness of US monetary policy but people need to keep in mind that firstly, it had a lot to do, and secondly its effectiveness does work on a time lag.
“Over the course of the year, we will start to see monetary policy find traction which will have a positive impact on equity markets and should also result in US bond yields moving up,” Dr Stammer said.
Altius Asset Management is a boutique fixed interest asset management business, formed through a joint venture with Australian Unity Investments in 2011.
The Australian Unity Altius Bond Fund adopts a dual benchmark approach, seeking to outperform both the cash and bond market*. The aim is to align the fund’s performance profile with investors’ expectations of positive returns over all market cycles. The Australian Unity Altius Bond Fund allows investors to effectively outsource the asset allocation between cash-like investments and fixed income.
*Over rolling three year periods the Fund’s objectives are to outperform the UBS Composite Bond Index by more than 1.5% per annum and the Reserve Bank of Australia cash rate.
For more information please contact:
Bill Bovingdon – Phone: 02 9112 4701
18 March 2013