Investors have been warned they could suffer significant losses as markets shift, as the majority of fund managers have no experience of a rising rate environment. Nomura’s Dickie Hodges says that investors will have to re-think their fixed income allocation as bond markets shift and “star” managers fall from grace, while Janus Henderson’s John Bennett warns many equity fund managers only know a rising stock market.
Over the past 30 years we have seen a significant rally across bond markets, with both interest rates and yields falling to record low levels. As a result, generating positive returns from bonds has not been difficult.
Hodges, manager of the Nomura Global Dynamic Bond Fund, warned investors to be wary of certain fund managers that have risen to prominence during the bond bull market.
“They all think they’re fantastic and that they can generate great performance when anyone – even my 10-year-old son – could have bought a Gilt and generated a positive return over the course of the last 10 years,” he tells Morningstar.
“I’d like to see what they’d do if interest rates do indeed move higher, because I don’t believe that many of them would be able to produce a positive return.”
Hodges, who ran the L&G Dynamic Bond Fund between 2007 and 2014, has positioned his fund to generate a return not just in fixed income bull markets, but also in bear markets.
His current areas of interest are European peripheral bonds, in particular Portugal, which was the best-performing bond market in 2017, and Indian Masala bonds.
Equity Fund Managers Also at Risk
The same may also be true of star equity fund managers, according to Janus Henderson’s European equities investor Bennett. His funds currently have a value tilt, meaning by his own admission he’s seen a couple of years of poor performance.
He’s recently been hiring to fill two vacancies in his team and is wary that younger fund managers only have experience of stock markets moving in a single direction.
“Most of the individuals I met have been running money for no more than three years, but even if it’s 10, they have only known one thing,” he explains. “Volatility forever falling, unbelievably low interest rates, a monumental bond bull market and therefore the re-rating of Terry Smith’s stocks, growth stocks, long-duration stocks.”
Bennett believes professional investors need to go through “a minimum two cycles, to see if they’re any good”. He describes Terry Smith, who has been running the Gold Rated Fundsmith Equity fund for eight years, as “a novice who’s only ever known a tailwind”.
But there is every chance that this environment could run for another decade, Bennett reluctantly admits. “In which case, I am toast.” However, he adds, “if one day there’s a tiny little flicker of a challenge to that regime, bring it on”.
He says we got a “taste of what’s to come” when global markets dropped at the beginning of February, “and when it does come, it’s going to be fun, because so few people have experienced a single down day, let alone what is a normal correction of 20%”.
