Duration and flexibility required, says Robeco’s van Trigt
Kommer van Trigt, who heads fixed income at Robeco, says concerns over duration and the flexibility to respond are key trends ongoing in the market.
Kommer van Trigt (pictured), is executive vice president Fixed Income – and as such head of Fixed Income Asset Allocation and head of Robeco’s Rates team. He has spent some 15 years at the Dutch manager, in its Rates and fixed
income products, focused on government bonds and other fixed income instruments.
Recently, he met InvestmentEurope, and outlined what he saw as two key trends in the market for fixed income. One is the search for yield, which he says has been encouraged year-after-year by monetary authorities. It is
still possible to get yield in the fixed income market, for example, in high yield, but there is context to consider. For some it is positive, with default rates remaining relatively low, companies fairly cash rich, M&A not skyrocketing,
and moderate economic growth.
But, Robeco is also hearing via its clients about the interest rate sensitivity challenge. It did some time ago come up with a zero duration share class, which relies on using interest rate swaps across the curve, van Trigt explains. There is a cost, but clients are willing to pay this, to get a spread or yield that will be more certain if the coming year sees changes to interest rates. For some clients it is a deliberate choice, for less sensitivity. Another trend is funds with a high degree of flexibility.
Year-by-year there is a high degree of dispersion between fixed income areas. For example, returns on Spanish and Irish government bonds may be above 10%, but emerging market debt may be down 8%. However, the winners and losers change year on year, which argues for active management, and flexible products have an advantage in this situation.
Van Trigt sees increasing demand for active duration management versus products with a fixed duration of 5% or 6%. The buffer to make up capital losses is much narrower than 10 years ago because of low interest rates, he
There is increasing interest among fixed income investors in the area of absolute return, but there is a need for gatekeepers to dig into what the product really does, for example, style differences between fund ‘A’ and fund
‘B’. Van Trigt sees a task for Robeco to explain its role in this area.
Also under consideration is whether fixed income should be rewarded on the fixed income performance rather than currency movements.
That is important because any number of investors still see fixed income funds as a core, stable part of their portfolios, which implies room for currency management.
Investors also need to beware the difference between absolute and total return, and implications for duration. Offering more share classes is positive because it enables the ability to tailor to investor requirements, although for
Robeco the default is to hedge out the currency risk, van Trigt says. For example, its global high yield bond fund offered in the Netherlands will hedge out dollar risk, but for the Swiss market it may be more useful to hedge in mind of the Swiss franc.
Managing liquidity is another challenge. Liquidity in fixed income has declined year on year as, say, the role of banks has been pulled back. Liquidity risk must be managed actively, with certain cash buffers to manage investors coming in and out of funds, van Trigt says. But there are also opportunities, say, where a contrarian investment style can exploit this liquidity change.
Van Trigt belongs to the camp of those who do not see a so-called great rotation taking place from fixed income to equity, and therefore says it is not a time to become negative on credit.
“We have seen more money go into equities funds at Robeco, but not at the cost of fixed income funds,” he says. There are some specific changes, such as demand seen for Robeco’s own Eurobond product because of challenges to
European sovereign bond markets.
Van Trigt has been cautious on buying corporate credits from Europe’s periphery. These can increase yield but can be expensive. But, he is more positive on eurozone peripheral government debt. Having seen a second year of high double-digit returns from this area, it remains a position that is not necessarily in line with consensus. Fundamentals in these countries are still an issue, but there are other factors driving the markets, such as the Outright
Monetary Transactions (OMT) commitment from the European Central bank, which van Trigt calls “a big game changer”.
There is different economic data coming out of the periphery and he expects a turn in ratings on these countries at some stage. Again, the possible changes ahead require an active approach, van Trigt says, especially when coupled with
a change in outlook for the US fixed income market and the shift there toward policy normalisation.