Strategic Fixed Income view: disruption simply exaggerating existing structural trends
John Pattullo, Co-Head of Strategic Fixed Income, provides a brief update on the team’s current thoughts on the markets and the opportunities they see going forward, while explaining the reasons for their optimism.
- We were always of the view that the world was short of growth and inflation and that bond yields would head lower. The surprise disruption of the oil price and the virus will simply exaggerate existing structural trends, creating a world of survivors (those with access to financing, though at a cost) and losers (likely smaller cap, more levered businesses).
- There has been an impressive wartime response from policymakers. In particular; we believe the US Federal Reserve’s support for the investment grade bond markets is materially positive.
- We remain optimistic on good quality, large‑cap, reasons to exist, global titans. While investment grade bond spreads have probably peaked, they remain reasonably priced on a risk‑adjusted basis and we have managed to lock in some sensible income streams for our investors in the past few weeks.
6 minute watch
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- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Callable debt securities, such as some asset-backed or mortgage-backed securities (ABS/MBS), give issuers the right to repay capital before the maturity date or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the fund may be impacted.
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- The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
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- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund may invest in contingent convertible bonds (CoCos), which can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares of the issuer or to be partly or wholly written off.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.