Andrew Wilson, CEO of GSMA EMEA and global co-head of Fixed Income, says a flexible approach to the bond market is required.
After the announcement of the “tapering” by the US Fed, Goldman Sachs predicted a sustainable turnaround in interest rates. Are you still convinced of this assessment?
Yes, we believe US rates are going to rise over the longer-term. We are not surprised that the initial stages of this long-term trend have been bumpy. We think the Fed probably decided to delay the tapering of its its asset purchases because of the sharp rise in rates that occurred after Chairman Bernanke first raised the prospect of tapering. The Fed wants interest rates to rise gradually and normalize over a period of several years, not spike higher in a way that chokes off the economic recovery.
The bond markets tend to be under pressure worldwide, while the yield levels are less attractive. What are the consequences for your bond strategy? Please describe the main features!
The main feature of our strategy is flexibility. We are able to look beyond traditional sources of return in the bond market and find other sources of return in the global bond markets. Yields are certainly low in many areas of the bond market and interest rate risk is unattractive. However, interest rate risk is only one component of risk in the global bond market. At any given time, we think there are other, more attractive risks that we can take in pursuit of better return potential.
Which sources do you use to gain returns and how do you act in declining markets? (e.g. duration management)
One strategy we can employ when rates are rising and fixed income markets are generally declining is to move to a negative position in duration risk. With a negative duration position, we would expect to profit from a rise in rates. However, that is only one example. Our unconstrained fixed income approach employs eight different return engines and we can increase or decrease risk in each of these depending on the opportunity set at any given time.
Three of these return engines are macro-oriented, where we are positioning for markets to move in a certain direction. These are our duration strategy, our sector allocation strategy and our currency strategy. The other five return engines are focused on finding value within markets. In these strategies, we are generally looking to hedge the market risk in order to generate returns from security selection, relative value views or other non-market-directional views.
What exactly do you mean when you talk about flexibility regarding bond- investments?
Our approach has many more engines that we can employ in pursuit of return, and that gives us more flexibility to choose which combination of engines we want to employ at any given time. We can tilt the portfolio to emphasize areas where we have the most conviction.
Most traditional fixed income strategies fall into one of two main camps: “Core” strategies that focus on government bonds and primarily look to manage interest rate risk, and “core plus” strategies that invest in a mix of government and corporate bonds and primarily look to manage credit risk. These traditional approaches generally have fewer return engines and that tends to limit the flexibility of the portfolio to pursue returns through non-traditional strategies.
So your strategy does not care about the standard benchmarks?
We are certainly aware of how market benchmarks are performing, but we do not measure our performance against these standards. We measure our performance by whether returns are positive. We are not looking to generate returns that are less negative than a market benchmark with unattractive returns. Equally important, we measure our performance by the amount of return we generate relative to the overall risk we take in the portfolio. We are not trying to take equity-like risk to generate bond-like returns. Our goal is to generate positive, bond-like returns by taking bond-like risk.