How are bond yields being affected in the current market environment?
If you look at the current geopolitics, it is rather clear that we are moving to a world where people want to be much more self-reliant: they are building up their defence, energy, self-sufficiency, and domestic supply chains. All these activities are very inflationary and good for growth as we emerge from the pandemic and will see spending rise significantly in markets that have full employment already. At the end of the day, that is what pushes up global interest rates and most likely central bank ‘neutral rates’ and is the reason why bond yields will have to keep rising across the curve. While real yields rallied considerably with the Ukraine war, they have somewhat paused as commodity prices rocketed. However, commodity prices have now actually come down slightly; they will go up again but on a gradual, more stable path, causing global bond yields to rise as people become less afraid that we will get a commodity roaring move that damages global growth.
How does the Strategic Absolute Return Bond (SARB) strategy mitigate inflationary risk?
We have a negative duration position in the fund via selling interest rate futures. We also own inflation protection via inflation linked government bonds. In an environment in which inflation hits all assets as we are currently seeing, having a derivative overlay to utilise in your alpha strategy is essential. More traditional long only funds might find it tougher going as the global inflation and growth profile shifts higher and so we recommend absolute return strategies that target alpha over market beta.
What are the expected returns for the SARB fund?
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. 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 with a return of roughly 21%.
The Fund Selector Asia Investment Forum Singapore was held on 15 March 2022 and was sponsored by Columbia Threadneedle Investments, Janus Henderson Investors, J O Hambro Capital Management and Jupiter Asset Management.
Find out more about what was discussed and the strategies that were presented here: https://fundselectorasia.com/events/fund-selector-asia-singapore/
