Commentaries

December 2020 - Higher debt levels – a necessary evil - Tactical Fund Manager's Comments

14 January 2021

Clement Perrette, Gilles Pradère

 

 The speed at which the global fixed income market reacted during the month of March and the subsequent recovery is undeniably no different to what has been experienced by other asset classes. Massive monetary and fiscal interventions all over the world to salvage the economy from an unprecedented economic contraction resulted in much higher central bank balance sheets and public/private sector debt. Simply put, we view the current situation as having Chinese origins and remedied with Japanese medicines, i.e. a combination of ZIRP and QE. For these policies to be effective, several conditions are necessary:

  • the support to the economy must be maintained well beyond the beginning of the recovery
  • higher fiscal and monetary policy integration
  • low debt servicing
  • more targeted investments from fiscal authorities (innovation, inequality reduction, infrastructure investments, etc.)

The low yield environment brings with it legitimate questions from investors as to the return potential of quality-biased fixed income investments. Looking back at what has been happening since the Global Financial Crisis and comparing the yield of Investment Grade bonds at the start of each year with the returns generated during that same year, it clearly appears that the yield level has not been a good predictor of performance. As investors, we believe we are better off remaining invested in fixed income markets, rather than staying on the sidelines, despite pronounced volatility phases.

Going into 2021, we remain constructive on the global fixed income market. However, there are pockets of the market where positive news are fairly priced in. In that respect, we continue to apply our core principles in managing investments, i.e. flexibility, diversification, quality and liquidity focused. Since the summer, we have been taking profit on some of our High Grade exposure and partly shifting the proceeds from richly priced bonds to more attractive areas such as Subordinated Financials and High Yield. We continue to keep our exposure to the Emerging Markets Sovereign & Quasi-Sovereign segment, where the combination of positive economic perspective with an attractive carry makes it attractive.
The below table illustrates the current positioning of the RAM Global Bond Total Return Fund. The risk level, ranging from 0 to 5, provides with an indication of the risk by strategy, with 5 being the maximum level of risk that can be taken in line with the investment philosophy of the fund.


Source: RAM AI, as of 31.12.2020

 

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