Causer (pictured), who heads up a number of funds at Invesco, including the £5.6bn Corporate Bond portfolio, acknowledges that we are coming to the end of a 30-year bull market for bonds, but says that the nature of the fixed interest market means that active managers will be able to find compelling value in a broad sense even as yields rise. Just as yields have not fallen in a straight line across the board in the last three decades, he says they will not rise in unison in the coming years, which gives managers more than enough opportunity to make money.
Performance of sectors since 1990
Source: FE Analytics
In an exclusive interview with FE Trustnet, he said: "It will still be possible to make money. I think it’s stupid to think there won’t be opportunities. Anyone analysing the situation and saying ‘we’ve had a great 30 years, but the bull market is over so get out of them and get into something else' – it’s preposterous, it just doesn’t make sense."
"People are going on and on about a bubble, but the argument becomes semantic. If you are in something at the top and it blows up, that’s bubble-like. I don’t like the use of it here because by using it you are saying that the asset has lost touch with its intrinsic value. There would have to be a sudden and sloppy collapse."
"Bond markets are different. It’s about cycles, policy, and setting interest rates that are in conjunction with the economic position. That’s where we are."
Causer says that if bond yields do rise dramatically in a short period of time, this would hit the vast majority of asset classes, including equities. He thinks a more gradual move is much more likely though.
"We have some headwinds now which will be with us for a while," he said. "We’re at a starting point where the position from central banks is very extreme, which will be dynamic for a number of years."
"There is an underlying current where yields have to go higher. How they will go higher is the question. If it’s sharp, then this will cause a shock to not only the bond but the equity market as well."
"There’s no way it will only hit fixed interest – bond yields are used for valuation metrics all over the place. If there is a more moderate bear market, it will still be possible to get positive returns all the way through."
Causer points out that the income bond managers get from their holdings is fixed, which provides investors with an important buffer even if yields do rise.
"The price will have to fall to a level that wipes out the fixed part," he continued. "This carry will be very important for a number of years."
The manager admits that some areas of the market do have severe risks attached to them, namely those that are susceptible to a rise in interest rates. Long-dated bonds have already suffered sharp falls this year, but Causer says fixed interest managers had more than enough of a warning to see this coming.
He says the fact that so many bond managers have been able to make decent money this year even though yields have risen in most areas shows that not all is doom and gloom for the asset class.
"At the moment, bond risk is duration risk," he said. "In May, when there was the big sell-off, US long-dated Tips fell 25 per cent. I would admit that was a bubble-like reaction."
"However, not everything behaved in that way. Some bond funds are up for the year, some are down."
According to FE data, of the 181 funds across the IMA Strategic Corporate Bond, IMA Corporate Bond and IMA High Yield sectors, 127 – or 70 per cent – have made money this year. Only 12 funds have lost more than 2 per cent.
Among the funds that have managed a positive return are Causer’s Invesco Perpetual Corporate Bond and Invesco Perpetual Tactical Bond funds, which have beaten cash and inflation in 2013.
Performance of funds and sectors in 2013
Source: FE Analytics
Causer rejects the argument that bonds are now more volatile than equities, believing such a claim is short-sighted.
"People talking about ‘bonds being more volatile than equities’ are just looking right now at the fact that certain areas have been more volatile, and are focusing on what happens when monetary policy changes," he said.
"We’ve always had cycles, but I don’t think bonds have suddenly become more volatile."
"Arguments about the relationship between bonds and equities – I do think it is valid to say that bonds dampen the volatility from equities."
"At any moment in the cycle, things can be different, but over any reasonable period of time, equities will be more volatile because company earnings and dividends can surprise and are therefore more volatile. The income you get from fixed income is fixed."
When asked about where the value in bonds is at the moment, Causer said financials were the standout area. He and co-manager Paul Read were among the first to back high-yielding financial debt, and their funds have benefited significantly from falling yields in the last two years or so.
Causer still thinks there is value to be had in financials, though warns that returns over the coming years will not be as strong.
"I think financials are still the standout area," he said. "After the credit crisis there were a lot of opportunities that came out. Given the run we’ve had, there isn’t the same kind of value, but financials are the place where there is relative value."
"It has already played out, but not completely. Things like Barclays and RBS still have enough noise around them for there to be a risk premium, but you’re not going to get the same kinds of returns that you’ve had in the last few years."
"Apart from that, there is some value creeping into emerging market debt. Whenever you get a shake-up like the one we’ve seen in EMD, that’s the time to look. To be honest, it’s not our primary focus," he added.
Causer’s Corporate Bond fund has more than 30 per cent in bank debt and a further 6 per cent in other financials. This high-conviction position has contributed to the portfolio’s strong performance over the past three years, on both an absolute and relative basis.
Performance of fund vs sector over 2yrs
Source: FE Analytics
The fund is ahead of its IMA Corporate Bond sector average – which is also its benchmark – over one, three, five and 10 years.
Causer and Read launched the Invesco Perpetual Global Financial Opportunities fund in January last year.
