Im Fokus: LO FUNDS–Absolute Return Bond

Portfoliomanager Gregor Macintosh mit einem Update zur aktuellen Positionierung des LO FUNDS–Absolute Return Bond Fund. Lombard Odier Investment Managers | 16.01.2015 10:31 Uhr
Gregor Macintosh, LOF-Absolute Return Bond
Gregor Macintosh, LOF-Absolute Return Bond
Archiv-Beitrag: Dieser Artikel ist älter als ein Jahr.

Our longer-term view remains that the liquidity provided by central banks since the financial crisis through conventional and unconventional monetary policy has masked the fundamental imbalances in the global economy. But, as the economic and monetary policy profiles of advanced economies decouple – with the US moving towards interest rate normalisation after ending its quantitative easing programme – the risk is that the underlying vulnerabilities of a weak global economy are exposed.

We have held this view for some time and in 2014 positioned early in trades that would benefit from these emerging trends, such as a stronger dollar and weakening impulse to corporate credit demand. This proved costly in the first half of the year, as harsh winter weather in the US obscured the underlying improvement in the economy, pushing back expectations of US interest rate tightening, in turn sustaining the rally in corporate credit markets. However, during the second half of the year, as it became more apparent that US economic strength was the most significant exception in a weakening global growth environment, our positioning for both lower government yields and our increased positive dollar bias supported returns. Our interest rate positioning was successful, benefiting from lower long rates and flattening yield curves. However, our credit positions underperformed as anticipated corrections, whilst brutal – reflecting the increased illiquidity environment, only provedshort-lived as the grinding decline in government yields continued to push investors to take more credit and liquidity risk in their search for yield.

The most notable example of the deteriorating market liquidity environment was October’s dislocation in the equity and interest rate and credit markets, which, while exceptionally extreme, was very quickly reversed. But this event was also significant because we believe it is indicative of the more volatile market environment we expect to prevail in 2015. Last summer, volatility across asset classes was pinned down close to multi-year or record lows. This period is now over and the combination of mature trends, high valuations and high leverage in an environment of low liquidity leaves asset markets very vulnerable in the event of a spike in volatility. The risk is for further market dislocations similar to last October.

Reduced liquidity, in particular, is likely to be an ongoing issue for established positions in a number of asset classes, and not just the most obvious illiquid candidates. October’s move in the Treasury market was an 11 sigma event in what historically has been one of the most liquid global markets. Liquidity and volatility considerations will influence our investment approach and we anticipate maintaining an opportunistic and nimble approach to market positioning.

Increased volatility is being underpinned by ongoing high levels of economic uncertainty. Five years on from the post crisis recessionand six years from the start of QE in the US, global growth is decelerating, inflation expectations are falling and investors are nervous. The big question for the coming year is whether the mature trends of the last five years in asset prices such as equities and credit finally come to an end. If growth remains weak equity valuations look challenging, while emerging market currencies look vulnerable to the reduction in global liquidity caused by the end of US QE.

We are now more cautious on the outlook for the US economy. Lower oil prices will provide a boost to consumption (not only in North America), but many of the benefits to the US economy from the shale oil and gas revolution have already accrued and potential dislocation in the energy sector from weak oil prices could undermine growth expectations.

Oil prices are also an important factor in the ongoing disinflationary trend, which is approaching deflationary levels. To the extent that low oil prices feed into longer-term inflation expectations, they maybe a factor in policymakers’ decisions and the argument between the growth/inflation consequences is already being played out in the public domain in the eurozone.

While interest rates are not strategically attractive at current exceptionally low levels, this view is widely held and already positioned for. Also, there is structural demand from pension funds and insurance companies for long-term fixed income instruments for asset liability matching purposes, so the decline in yields may yet persist in the first part of the year. However, underlying yield levels provide investors with little protection for rising interest rate or credit risk let alone liquidity risk, which we believe is intensifying as a function of reducing secondary market participation by traditional liquidity providers.

Overall, the increased volatility in the second half of 2014 positively impacted our investment performance. Given our expectation that volatility will increase, this creates more opportunity because of the flexibility in our mandate and we are excited by the prospects for 2015.

FUND PHILOSOPHY:  LO Funds–Absolute Return Bond

The LO Funds–Absolute Return Bond follows an absolute return approach to fixed income investing. It aims to deliver returns of Cash +4% over a cycle with a volatility target of 5%. The fund is highly flexible in its approach and has the ability to go long and short interest rates, credit or FX based on the team’s views of the markets.  

Our investment strategy combines the macro views of the aggregate investment team and the individual skillset and experience of highly specialised portfolio managers. The fund therefore features several specialized sub-portfolios in order to efficiently express all investment views and provide a diversification of return sources.

Gregor Macintosh, LOF-Absolute Return Bond

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