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A strategy for all seasons

Mark Nash explains the merits of an ‘absolute return’ approach to fixed income, in an era of dramatically changed policymaking when fundamentals are no longer enough.

Mark Nash, fund manager of the Jupiter Strategic Absolute Bond fund, explains the merits of an ‘absolute return’ approach to fixed income, in an era of dramatically changed policymaking and an environment in which fundamentals are no longer enough.

Due to the errors of policymakers, the post-financial crisis era was marked by low growth and low inflation. The dominance of central banks in that environment proved very supportive for financial assets. In that falling yield and low volatility world, economic outcomes were poor as central bank liquidity flowed directly into financial assets.

Since the onset of the Covid pandemic, however, the policymaking landscape has dramatically changed. Fiscal spending is unlikely to disappear anytime soon as inequality and global warming issues are addressed. Central banks will remain supportive but will take more of a backseat, while ensuring that banking systems are in good health to support the recovery.

Better for the economy, worse for fixed income

This reflationary environment will see higher growth and higher inflation, with yields rising. In my view, a more ‘absolute return’ approach will be needed to achieve positive returns from fixed income. Funds with the ability to take short positions either outright or for relative value investments will therefore have an advantage, aided by the flexibility to invest across the fixed income universe to find returns.

Worst start to the year for bonds since 2009 (global agg. USD unhedged)

101134 Global Agg chart 750px-100

 

Source: BBG

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