With fear and greed said to be the two emotions that drive financial markets, Royal London Asset Management’s Eric Holt said investors should be wary of being too greedy in these highly changeable market conditions.
Bond markets have been roiled by the rise of populism as represented by Brexit and the election of Donald Trump as US president in recent years, the FE Alpha Manager said.
Not only were both of these events largely unanticipated, he noted, but the market reactions to them were also unexpected.
“There’s an awful lot of uncertainty out there,” the Royal London Global Bond Opportunities manager explained. “Nobody knows what lies ahead. Brexit, ‘no-deal’, general election—we just don’t know.”
Holt said that this unpredictability is one of the major challenges facing investors in the current environment.
“We’re not in a situation where expectations stay stable necessarily. It’s very dynamic, so how everything comes out remains uncertain,” he said.
However, Holt said there were pros and cons to every scenario.
Indeed, the weakening of the sterling more recently as the possibility of a ‘hard Brexit’ has increased, though a challenge, is a mixed blessing for the UK economy, according to the manager.
“On the positive side, it will enhance the values of overseas earnings and make the UK more competitive,” he explained.
Turning to the bond market, he said low yields, especially for UK government bonds, remain a real challenge for investors.
Yield from British Government Securities, 10-year Nominal Par Yield
Source: Bank of England
“Where gilt yields are is really important in the context of where prices are,” he said. “10-year gilt yields are currently about 0.65 per cent, half of where they were at the start of the year, which was a heady 1.2 per cent.”
Yields are a particular challenge for fixed income investors, with the manager noting that the amount held in bond assets where returns are negative “is absolutely eye-watering”. 
“It’s in billions,” he said. “It’s just where we are.”
When yields are low, he said, the ability to make investments and getting attractive returns becomes more challenging than people tend to think.
But the problem is not confined to the UK alone, as government bonds elsewhere, particularly in Europe, also suffer from low yields.
“It seems strange to see somebody lend his money to the German government for 10 years, and accept a negative return,” said the Royal London Global Bond Opportunities manager.
However, Holt (pictured) said yields have looked low for a long time, adding that bond funds have not performed badly in spite of that.
“To be sure, it’s not around 20 per cent like equity, but it’s around seven and eight per cent,” he said. “So, it’s great looking backwards.”
The incremental yield that you get for being in investment-grade corporate bond is narrow, he noted: “But that generic incremental yield is very attractive, we think. And we think you can build a portfolio which enhances that generic incremental yield.”
Holt challenges the common notion that that government bonds are risk-free.
“That’s just a distorted view of what risk is,” he said. “You’d expect the government to pay you the amount they owe you in real terms. It says nothing about what the value of that investment is.”
When it comes to the five FE Crown-rated Royal London Global Bond Opportunities fund, Holt and his team are rather guarded about credit ratings.
“We tend to be circumspect about the completeness of rating agencies in terms of telling you what you want to know because they’re looking at things from a point-in-time perspective, which is a fairly one-dimensional process,” he said.
The manager considers the life of a bond “rather than at a point of immediacy”.
“We also look at what happens if a company’s fortunes do take a downturn. And also, how risk is mitigated by structural constraints,” he added.
For investors interested in the bond market, Holt said there is wide range of opportunities: “The price of corporate bond to government bond is really quite attractive.”
He stressed that it’s important to understand the sensitivity of prices to gilt yield within this space, and to have the right appetite for this risk.
“We’ve had low interest rates for 10 years now. The low interest environment is sneaky,” Holt said. “Cash doesn’t pay much, and inflation can eat away at your money in bank. It’s really important to try to earn a return.”
The Royal London manager said consistency of income is an attractive aspect of bonds.
“As I see it, the ability to generate income in that balance of risk and returns is really important, because that just underpins total return,” he said.
While it’s difficult looking forward, he said, the current environment flags up the need for diversification. “Do not to have all your eggs in one basket.”
“We’ve seen the ability of markets to be volatile, to defy rationalisation for a while,” he said. “I think that’s one of the important lessons to take away from what’s going on.”
He said the current market calls for caution, adding: “Work out what your objectives are and don’t be greedy,” he said. “I’m not saying don’t be ambitious.
“Don’t be thinking, this thing has delivered 6, 7, or 8 per cent in the past, so it’s going to deliver 6, 7, 8 per cent in the future,” he concluded.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Holt has managed the £156.9m Royal London Global Bond Opportunities fund with colleague and FE Alpha Manager Rachid Semaoune since its launch in December 2015.
During this time, it has returned 26.38 per cent against 17.33 per cent for the average IA Sterling Strategic Bond peer. It has a yield of 5.77 per cent an ongoing charges figure (OCF) of 0.50 per cent.