What is likely to be the greatest contributor to the performance of your total return bond strategy this year?
The main theme of this year is going to be the ongoing surge in inflationary pressures in the global economy and how the central banks deal with this situation. This theme has been made significantly more difficult by the war in Ukraine and the fact that these inflation levels have not been experienced for 30-40 years. However, we believe this is the most significant macro-economic move in the foreseeable future and therefore gives our strategy the greatest opportunity to deliver diversified alpha for our investors.
How does the strategy mitigate volatility, drawdowns and a macroeconomic outlook that is negative for bond markets?
As the strategy has the ability to go short as well as long duration (+/- 5yrs at the fund level), the team has a full range of exposures to deliver returns whether yields are rising or falling. With the ability to go long and short rates at different parts of the maturity spectrum, the team also has the flexibility to be very precise about where those interest rate views are taken on the curve. Volatility and the control of risk for the strategy is at the very heart of what we do. As a team, we are targeting a level of implied volatility of around 4-5%, which we have chosen to mirror the volatility of a medium dated US treasury bond. This targeting of risk and also the constant assessment of the risk environment in bond markets and in the wider financial world has allowed us to deliver limited drawdowns over the life of the fund, despite some extreme market events over that period.
What are the expected returns and what are the biggest risks for the strategy?
As stated above, we target an implied volatility level of around 4-5% and believe over the cycle that we can deliver a Sharpe ratio of around 1. As such, the expected returns over the medium term should be around an annualised return of +4% over our cash benchmark. This Sharpe ratio is something we have been able to achieve over the life of the fund.
The Fund Selector Asia Investment Forum Hong Kong was held virtually on 8 March 2022 and was sponsored by HSBC Asset Management, Jupiter Asset management, Nuveen and Vontobel Asset Management.
Find out more about what was discussed and the strategies that were presented here: https://fundselectorasia.com/events/fsa-investment-hong-kong/
