With rising rates in most major markets, bond funds with the longest dated bonds are looking increasingly risky and long-only investors may be better off in equities, especially after the recent cheapening, according to GAM.
Additionally, the bond market was under pressure from many angles and investors would need the capability to take advantages of opportunities, the firm said.
GAM identified a few key problems with the bond market which included rising headline inflation, the end of the bond-buying programs under Quantitative Easing (QE) while many countries were pressing for a return to normality of modestly positive deposit rates.
Also, the starting level of yields was important for the period of measurement as in case of Germany which was the worst-performing country in fixed interest last year despite its thriving economy.
GAM’s investment director and lead manager of the GAM Investments Absolute Return Bond Fund (ARBF), Tim Haywood said that a further challenge for bond funds would be that credit spreads on traditional bonds which could become tight.
Also, for the past 12 months there was very little volatility in financial markets as bond and equities rose, so passively managed long-only investments looked like a smart idea however January was the first month when many hedge fund styles made money.
“Volatility has woken up, asset prices are generally declining, which may eventually hurt certain risk parity offerings,” he said.
“Equities have done pretty well, although some markets had become fully priced, the recent declines are a healthy correction, as of 6th February, on the assumption that the growth and optimism continue.
“I may be one of the few fund managers in the world who has been promoting to those who can only buy securities, to buy something else, as opposed to being permanently optimistic for the asset class I represent.”
In January, the ARBF said it sold four of its most equity-sensitive securities and moved to a more balanced portfolio.
