Each week, a professional investor tells us where he'd put his money. This week: Myles Bradshaw of Amundi's Global Aggregate fixed-income fund picks his favourite sectors.
Central banks' quantitative-easing money-printing policies have caused bond yields to plummet over the past few years. Historically low yields have made it extremely difficult to earn an attractive return on capital. Ten-year gilts yield 1.25%, over a full percentage point below the annual rate of consumer price inflation. So it is no surprise that many strategic bond funds have responded by simply shifting into riskier, high-yield debt.
The Amundi Global Aggregate fund, however, has a more diversified strategy. We invest across the world's markets to maximise our opportunities, and we then apply a proprietary model to help adjust risk so that uncorrelated strategies have a bigger position than correlated bets. Having too many assets that tend to rise or fall together makes your investments more vulnerable to volatility.
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Our approach helps us build robust, diversified portfolios. We also have the flexibility to hedge against some of the risks that come with global investing. For example, if we want to own an attractively valued bond in a currency we deem risky, we can hedge the currency risk and stick with the bond.
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Opportunities in forex
One of the most effective ways of increasing expected returns while preserving credit quality and liquidity is by investing in currencies. These don't have to be exotic or particularly risky to have a positive impact. Currency strategies have helped us bolster investors' returns while keeping the correlation of returns with the broader bond or equity markets low.
One of our favourite positions at present is the US dollar, which benefits from higher interest rates and a strong US economy. The dollar, as the global reserve currency, also profits from its "safe-haven" status whenever global investors' sentiment sours something that is starting to happen more often due to the increasingly unpredictable political environment.
An overlooked sector in the US
We are also investing in an oft-overlooked sector: US inflation-linked bonds. These bonds increase both the regular coupon and the final amount paid back to investors in line with inflation. With the US economy surging ahead and unemployment at an 18-year low, employers will have to offer higher wages, in turn leading to higher inflation.
The market has become used to low inflation despite very low unemployment; a return of rising wages and prices would surprise investors. So these bonds are attractive even if US inflation remains around only 2% for now.
Continued strong global growth and rising inflation should help keep company default rates low, which is good news for corporate bonds. Within the corporate-bond sector, our preference is for European banks, where valuations are more attractive than elsewhere.
The improvement seen in the eurozone economy should also boost credit quality. Bank regulation is getting ever tighter, which might make it harder for banks to grow profits in future, but the industry should provide solid and dependable coupon payments for now.
These examples combine simple, liquid, high-quality and loosely correlated assets in a globally diversified portfolio, which is the key to consistent total returns without unsettling volatility.
