It is hard to imagine the saintly readers of portfolio institutional venturing into a casino but, if they absolutely had to, presumably they would prefer to avoid risking their chips in one where the tables were rigged. But what if they knew in advance the tables were not playing straight and so could adapt their approach accordingly? Could things then be made to work in their favour?
Perennial optimist that I am, I have been using this analogy for a while now to draw some comfort from the ongoing gravity-defying feats of the sovereign debt markets. Quantitative easing may ultimately end up with as many sequels as Police Academy (and the results progressively as dire) but might there be a way bond investors can continue to make a turn along the way? Over the last month or two, I have aired this thought, along with my other pet fi xed income theory – that gilts may not be a bubble but, when investors own an asset not because they want to but because they are too scared not to, it hardly suggests all is well with valuations – on a number of bond fund managers. As each one has ignored my question and answered a di_ erent one, their reaction has varied only in the ratios of amusement, pity and contempt in their eyes. For what is left of my ego, therefore, if nothing else, I am grateful to M&G Global Macro Bond fund manager Jim Leaviss for at least indulging me on both points. “On the face of it, gilts, bunds and treasuries do look poor value,” he replies. “However, one of the big themes to emerge on the fund in recent years is the idea of central bank ‘regime change’, by which I mean central banks no longer care about infl ation because they have two other huge problems to deal with – unemployment and debt. “So, in a way, the market is rigged in investors’ favour as there is an infi nite buyer of the thing they already own – and, hopefully, it will become even more rigged. Maybe the answer to the global debt problem is central banks end up buying back the bond markets and then conveniently make those bonds disappear.” Less surprising than Leaviss’s tolerance of my attempts at bond philosophy perhaps is his contention investors’ real hope of profi ting from bond markets now lies in having the fl exibility to hunt down opportunities anywhere in the world. The fact he happens to know just such a fund and one that has shown it “can beat all the fi xed income sectors with low volatility of returns as a result of a diversifi ed range of views” does not make his argument any less valid. Interestingly, the fund makes no reference to benchmarks on the basis they do not work for bonds. “The more an economy or a company borrows, the bigger its weight in a benchmark becomes,” Leaviss explains. “The benchmark becomes one of sin rather than triumph.” An appropriate enough conclusion for my casino metaphor.
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