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The choppy financial markets of recent weeks were a test for the investment strategy of Robeco’s Global Total Return Bond Fund. Portfolio manager Kommer van Trigt talks about how his fund has weathered this particular storm and why his selective approach has paid off also in the long term.
It was a decision that went against the grain: to increase the interest-rate risk of Robeco’s Global Total Return Bond Fund in the first weeks of 2016. “In the context of low inflation, we increased the portfolio’s sensitivity to interest rate changes significantly from 4.5 in December to 6.5 at the end of January. This higher rate sensitivity is prompted by the central banks, which are – and for the time being will continue to be – in loosening mode,” explains Van Trigt.
At the same time, the fund manager brought down the level of corporate bond investments considerably – reducing the credit risk in the portfolio by a quarter. “The credit risk reduction was prompted by less positive expectations for economic growth in the US and ongoing concerns about the Chinese economy. Corporate earnings are under pressure, which is weighing on risk sentiment and the investment climate. The credit cycle has matured and spreads have widened.
These two decisions were the key reasons why Robeco Global Total Return Bond Fund delivered a positive return of 1.34 percent in the turbulent initial weeks of 20161.
Not all of Van Trigt’s decisions had the desired effect though. Investments in subordinated debt continued to put pressure on the fund’s returns at the start of the year, performing worse than non-financial corporate debt. Although investors currently have little confidence in banks, Van Trigt remains positive about the financial sector.
“The returns will be back, because banks and insurers are meanwhile reorganizing in order to bolster their balance sheets. I think that the write-downs we saw at the beginning of February went too far, given the structural developments in this sector. However, the selection of strong issuers is very important in this segment. Avoiding losers is more important than finding winners. But I definitely see opportunities here.”
The fund manager indicates a preference for banks in Western Europe and Scandinavia.
Van Trigt stresses that less than 2 percent of Robeco’s Global Total Return Bond Fund2 portfolio is invested in ‘cocos’ – which there has been a lot of fuss about recently. These contingent convertibles are bonds issued by financial institutions that can be written off or converted into shares once the issuer’s buffer falls below a certain predetermined threshold value. Investors have become less certain about the coupon rate of some of these bonds.
‘A global view, flexibility and selectiveness are the credo for bond investors’
Looking ahead to the near future, Van Trigt believes it is important for bond investors to keep a close eye on the next ECB meeting in March and data on the US economy. The portfolio manager expects the ECB to announce further stimulus. The US economy is showing mixed signals, says Van Trigt. “Some economists think a recession is on the cards, but I don’t support that view for the time being. The data on employment opportunities and consumer spending are still too good. But a recession cannot be ruled out. The question is how will the stress on the financial markets in recent weeks impact the real economy. It always takes a while for this to become clear. We’ll find out in the coming weeks.”
But as the global economy is facing low growth and low inflation, Van Trigt doesn’t think a bear market for bonds is likely. “The central banks in Europe and Japan will continue to take stimulus measures. And while previously the market expected another Fed rate hike, in the wake of recent US economy data this expectation is much more subdued now. For me too.”
The developments in the US have an important impact on returns from investments in emerging market local debt. Despite the fact that such bonds have been out of favor with investors since 2013, Van Trigt is currently increasing his fund’s exposure to this asset class. According to Van Trigt, in the current market environment it is important not to hedge the currency risk of emerging debt. This is disproportionately expensive, and you can’t benefit optimally from a recovery of this asset class. Van Trigt: “We have been waiting for a turnaround in emerging markets for some time now. The US dollar appreciation is expected to flatten out, which will be beneficial for bonds denominated in local currency.
However volatile the year has begun and whatever challenges may lie ahead, Van Trigt still sees investment opportunities. “A global view, flexibility and selectiveness are the credo that will help bond investors achieve positive returns in these difficult conditions. We look for attractive global investment opportunities in bonds for Robeco’s Global Total Return Bond Fund and in the past have shown that we won’t hesitate to take significant positions when opportunities arise. This is the advantage of our flexible approach. We operate independently from the benchmark and pursue an active duration policy. For us, achieving stable returns and capital preservation is more about overall performance than outperformance.”
1The performance was measured on 15 February 2016 before deduction of costs and based on the DH EUR share class.
2As at end January 2016.