When I began my career in this industry, back in the mid-1980s, the investment world was a simple place. In terms of the information available to a budding portfolio manager, the height of cutting-edge sophistication was a small TV, tuned to BBC Ceefax (the world’s first teletext service) on which the latest figures for FTSE 30 and All Share Indices – the FTSE 100 didn’t even exist yet – the Sterling/Dollar and Sterling/Deutschemark exchange rates were refreshed every 15 minutes. If I wanted to look up a fund price, I grabbed that day’s copy of the Financial Times (no internet!) and to check its performance, referred to a monthly magazine that tabulated returns over one, three and six months, or one three, five and ten years. Aaah, good times…
These days it’s all rather different. Indeed, with so much information and so many opinions available to us from so many sources, one of the biggest challenges facing an investor today is trying to filter out all of the ambient noise and form a clear picture of what’s really important. Perhaps the least helpful aspect of this is that reasoned comment has become a scarce commodity as, in order to compete for our attention, sensation and hyperbole have become the financial media’s stock in trade. Stocks and currencies PLUNGE! or JUMP! by 0.5%; markets are STUNNED! by an earnings report or economic figure that misses the consensus estimate by 0.1%; MELTDOWNS! are always imminent. It’s all too easy to get carried away by the hype.
At the time of writing, the latest thing exciting the talking (shouting?) heads in the media is the impending collapse of bond markets after the HUGE SPIKE! in the ten-year US treasury yield – from 2.41% to 2.55% (!) – since the year-end prompted comments from (among others) the former manager of the world’s largest mutual fund – a man once dubbed “The Bond King” – that, for fixed income investors at least, the sky is about to fall in. So we should be worried, right?
For a number of reasons, we think not.
Firstly, it’s difficult, to reconcile such an apocalyptic forecast with the scale of the market’s latest move; as the accompanying chart shows, there have been a number of instances in which yields have “gapped up” (and bond prices have fallen) by far greater amounts in the past few years, after which they have either recovered or tracked sideways. Based on the prevailing macro background, we have no reason to expect that this pattern of behaviour will not be repeated this time around.
Secondly, this is merely the latest in a series of pronouncements from said gentleman calling for a sharp correction and/or severe bear market in bonds in the recent-ish past. Based on that track record, it’s difficult to attach too much credibility to it.
Thirdly, and perhaps most importantly, by design the funds that we own within the fixed income portion of our portfolios bear no resemblance whatsoever to the broad bond market, both in terms of their composition and performance characteristics. Even if the market were to embark on an extended decline, therefore, it’s our expectation that our managers would protect us from the impact of that move. Indeed, based on past history (and certainly if last year is anything to go by), it’s entirely possible that, collectively and individually, they can continue to generate positive returns.
