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Waarom actieve duration het antwoord is op aanhoudende onzekerheid

20-09-2012 | Visie | Raymond Verstraelen

Maakt u zich zorgen, nu de rente op staatsobligaties zo laag is? Actief durationmanagement biedt beleggers de kans geld te verdienen in zowel bull- als bearmarkten, terwijl met tactische positionering kortetermijnwinst kan worden behaald.

(Dit is een Engelstalig artikel)  

Key points

  • Uncertainty rules thanks to political risk
  • Dramatic & rapid bond-market moves are possible
  • Active duration management is effective in both bull & bear markets


Rarely, it seems, have so many market participants had so little conviction about the economic outlook. Uncertainty has dominated in recent months and shows no signs of diminishing. In fact, it has become the consensus.

What is behind this hesitancy? “The uncertainties facing the major economies stem mainly from political risk, which makes their outcome notoriously hard to predict,” explains Portfolio Manager Raymond Verstraelen.

Politics certainly play a big role in many of the issues hanging over the market. In the eurozone, the politicians have so far failed to find a definitive solution to the debt crisis. Moreover, politics will be central in any decision over Greece remaining in the shared currency—or not. That said, the situation in Europe is hardly being helped by the continent having flopped back into recession.

Can the US sort out potentially serious problems ahead?
Across the Atlantic, politics are just as central. November’s US elections will play a decisive role in a number of important economic issues. For one thing, if Congress fails to act on the “fiscal cliff” before the end of 2012, USD 500-600 billion of tax increases and spending cuts—equal to 3-4% of GDP— will kick in automatically at the beginning of 2013.

"The uncertainties facing the major economies stem mainly from political risk" Meanwhile, the sustainability of the US debt position will be called into question if government spending, which is so vital for growth, is not reined in. And the US debt ceiling needs to be raised again: the country’s borrowing is set to hit the legal limit towards the end of the year. There’s a risk of a government shut-down as soon as February 2013.

These hurdles stand against a backdrop of slowing global growth—China in particular is a concern—while oil prices are on the rise again. “This is creating uncertainty about how inflation will ultimately respond to central banks’ unconventional quantitative-easing policy measures,” notes Verstraelen.

Scope for rapid changes in bond yields
So worrying scenarios abound. But there is also optimism that things will turn out OK. It could go either way. And depending on how the key issues pan out, yields could move rapidly.

Take the case of some sustained good news. This could take the form of a positive outcome to the US presidential election, moves that succeed in avoiding the fiscal cliff and/or a genuine solution for the eurozone crisis being hatched. In such circumstances, says Verstraelen, restored investor confidence could provoke a fundamental shift in bond markets. Yields would go higher.

He believes that this would be more than a short-term spike in interest rates. Instead, he argues, there would probably be “a sustained move towards a higher equilibrium”.

Still, such good news is by no means guaranteed. Far from it. In other scenarios—if the eurozone crisis re-ignites or if Congress fails to deal with the fiscal cliff, for instance—risk aversion would increase.

The conundrum facing fixed income investors is that they neither want to miss the party nor be trapped in a losing position. “The current low level of yields does not provide much of a cushion against any dramatic sell-off,” warns Verstraelen.

Turning volatility into opportunity
And in an environment characterized by uncertainty, market fluctuations can be sizeable, which increases the likelihood of false signals being sent out. Just look what happened earlier this year. In March, ten-year US government bond yields rose from 1.95% to 2.40% in a matter of days, provoking analysts to declare the start of a bear market.

“Active positioning is supported by high liquidity and low transaction costs”

They were wrong. The ten-year yield fell back over the spring and summer, hitting a historic low of 1.38% on 25 July, before moving back to the current 1.84%. Nor is it just the US market. German Bund yields have moved in a similarly volatile manner.

One answer to this uncertainty is active duration management. That’s because it is a strategy that can work both when yields fall and when they rise. Active duration management, which is a key part of Robeco’s fixed-income investment philosophy, has proven its value under various interest-rate regimes.

In short, the process can respond adequately to the fluctuations in bond yields, irrespective of the market environment. “Active positioning is supported by high liquidity and low transaction costs,” notes Verstraelen.

Structured approach needed
But how do Verstraelen and his colleagues anticipate market developments and get in the right position to benefit from moves in the current unstable markets? The team’s structured process—which is supported by various quantitative tools, such as the duration model—is key. The duration model has been successfully in use since 1995.

“Active duration management requires reliable forecasts for the direction of interest rates,” explains Verstraelen. “Our quantitative model provides such signals in a systematic way.”

At the same time, it is also important to control the emotions. “It is important that portfolio managers do not to react every time a European politician opens his mouth,” he notes. Otherwise, there’s a risk of being whiplashed if too much credence is given to these ephemeral alternating buy-and-sell signals.

It is a process that has proven its value. Verstraelen points to extensive research into performance that has been carried out. “We have looked at the duration model’s behaviour in the US since the 1960s, and the results are very satisfying,” is the way he puts it. The research focused not only on the general behaviour of interest rates, but also on the inflation environment. He says that the model performs well not only in bull or and bear markets, but also at times when inflation is high or rising.

Chart 1: active duration works in up markets and down markets

Grafiek-duration.jpg 

Source: Robeco Lux-o-rente EUR DH share; performance figures gross of fees, based on net asset value; all figures in EUR

The best way to see that is to look at the long-term performance of a fund that has followed the model. Chart 1 shows the 12-month rolling performance of Lux-o-rente, a Robeco fund that has an active duration strategy, plotted against the yield of the ten-year German Bund. On all but two occasions since the duration model was introduced in 1995, the chart shows a positive performance, even as the bond market has moved up and down.

“In the current uncertain environment, there is the potential for large moves in bond prices,” concludes Verstraelen. “Active duration management can contain the risks and profit from the opportunities in this climate.”

The value of your investments may fluctuate. Past results are no guarantee of future performance.

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