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Gam shuns government bonds

Developed government bond yields just aren't there and the firm’s multi-asset product managers instead look for more niche fixed income.
Larry Hatheway, Gam Investments

Although longer duration fixed income instruments, such as developed government bonds, had a strong run in the fourth quarter last year, they are uninspiring, said Larry Hatheway, group head of investment solutions and chief economist at Gam Investments.

“The prevailing level of yields and valuations for US treasuries, European government bonds as well as Japanese government bonds are pretty unattractive for us. They will generally not perform well in multi-asset type portfolios,” Zurich-based Hatheway told FSA on a recent trip to Hong Kong.

The firm has instead looked for investments in other areas in fixed income, which Hatheway described as “specialty credit”. These include US mortgage-backed securities (MBS), insurance-linked credit instruments and subordinated debt, he said.

For example, the GAM Star Balanced Fund, managed by Charles Hempworth and James McDaid, is a mixed asset product that invests in other mutual funds focused on various asset classes.

About 10% of the portfolio is invested in the Gam Star MBS Total Return Fund, according to the fund factsheet.

“What we’ve done is we have gone to [the MBS team], who are specialists in this space, so they can identify for us shorter duration areas in the MBS market, which is an area we have some preference for,” Hatheway said.

“They also help us identify the underlying credit research risk associated with mortgage-backed securities.”

Year-to-date, US MBS have squeaked out a better return than US government bonds. The Bloomberg Barclays US Mortgage Backed Securities Index returned 2.17%, while the Bloomberg Barclays US Government Index returned 2.10%, according to data from FE.

The remainder of the balanced fund’s fixed income sleeve is invested in the firm’s Active Global High Income Bond Fund (7.9%) and the Star Credit Opportunities Fund (5.1%), according to the fund factsheet.

Yet the outlook for fixed income seems to be souring. Rachel Harris, senior investment director at Aviva Investors, said despite high yield bonds reigning as the most attractive sub-asset class, returns could reach only 5% this year.

Gam’s Hatheway said he prefers equities over fixed income. “We’re prepared to take some exposure there and have been generally focused on areas like quality as a style and minimum volatility as well.”

Nearly 60% of the firm’s balanced fund is invested in other equity funds. Europe, which had unusually weak growth in 2018, gets the largest geographic allocation (19.1%).

The fund’s three-year cumulative return to the end of February was 18.84%, under-performing the benchmark Lipper Global Mixed Assets GBP Balanced Index, which reported 22.43%, the factsheet shows. In calendar year 2018, the fund also fell more (-8.6%) than the benchmark (-3.9%).

Ongoing charges, according to FE, are relatively high at 3.02%, against the median 1.80% for the mixed asset category.


The Gam Star Balanced Fund versus its category in Singapore

Source: FE. In US dollars. The fund’s factsheet lists the benchmark as the Lipper Global Mixed Assets GBP Balanced Index, which is not available in FE.

Part of the Mark Allen Group.