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Commenting on the wider financial backdrop, Bentley says the key challenge facing fixed income investors in 2017 could be managing volatility in a global economy facing increasingly expansionary policies in the US and a more positive growth environment in Europe, offset by political unpredictability.
“While we expect to see some growth in the US and Europe, there are risks and fears inflation could get out of control if it rises more rapidly than expected. There is also some concern over whether US growth policies will be executed properly.
“These, together with concerns on the Chinese economy and uncertainty over the forthcoming European elections mean managing upside/downside volatility in 2017 will be key themes,” he adds.
Market moves
While the US Federal Reserve’s (Fed) central forecasts indicate it will raise interest rates up to three times this year, Bentley, who co-manages the Absolute Return Bond Fund at Insight, a BNY Mellon boutique, was sanguine about the impact of any hikes. He believes they have already been largely factored into the market.
“We agree on the central case for Fed interest rate hikes but realistically we believe that is not what is going to drive fixed income markets this year. Instead, we think bond risk scenarios and concerns about inflation could dominate thinking,” he says.
“One risk scenario is the danger that inflation gets out of control, the Fed does not do enough and bond yields spike more quickly. Equally, another risk is that President Trump’s pro-growth policies become watered down and are not as effective as initially expected and the US economy starts to slow down towards the end of the year.”
Against this unpredictable backdrop, Bentley says his Absolute Return Bond strategy aims to deliver cash three months EURIBOR +3% on a rolling annualised three year basis (before fees).[1] Since its launch in 2012, the Ucits Fund has aimed to deliver consistent returns across a range of different market environments and has demonstrated relatively low volatility.
“The strategy is targeted at investors who are looking to generate non-directional fixed income alpha or added value. We believe in analysing different areas of fixed income in depth, generating ideas that can give us an extra edge in terms of coverage and adopting a systematic investment process with tight risk controls and procedures. We invest in fixed income in a non-directional way - making money in different markets rather than relying on markets to go our way.”
Flexible allocation
The absolute return style of the strategy means the managers seek to avoid the interest rate risk inherent in traditional bond funds.
[1] However a positive return is not guaranteed and a capital loss may occur.
According to Bentley, the strategy is highly diversified across a blend of fixed income assets, offering strong liquidity despite some holdings in areas that may be considered more illiquid. “In the interests of liquidity, we always maintain a high level of cash or cash-like instruments within the strategy,” he added.
Looking ahead, Bentley says he sees potential pockets of opportunity in a range of fixed income sectors - including emerging market (EM) debt - with low correlations to US Treasuries and bunds. “In terms of very short maturity EM plays, markets such as Brazil, Russia, Indonesia and Colombia all offer high yields and decent value provided you adopt a cautious approach to currency exposure - hedging currency risk while taking yield,” he adds.
Credit potential
On the credit spectrum, Bentley predicts a relatively benign default environment for assets such as high yield in the months ahead, adding that he prefers to seek selective opportunities in short maturity high yield instruments. In the government bond market the strategy has a short bias and while Bentley said he expects yields to rise, he remains cautious on developments within the sovereign bond sector.
Against a backdrop of rising inflationary pressures the strategy has recently taken advantage of potential benefits in the index-linked bond market.
Commenting on market prospects for the months ahead Bentley says: “From a market perspective, we believe we are in a mildly positive growth phase which holds pockets of opportunity but also some potentially high risks, especially but not exclusively based on political risk.
“While we do expect inflationary pressures to build, particularly in the US, we believe there are also some positive stories to come. The key, whether investing in the US, Europe or other markets is to be selective about the assets you buy. Careful research and thorough risk assessment and management will be important factors in achieving success in the months ahead,” he concludes.
Important Information
Past performance is not a guide to future performance
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed. For Professional Clients only.This is a financial promotion and is not investment advice.Any views and opinions are those of the investment manager, unless otherwise noted. Portfolio holdings are subject to change, for information only and are not investment recommendations. For further information visit the BNY Mellon Investment Management website. INV00658 exp 30 June 2017