James Gard: Now we've had three central bank decisions this week and bond markets are making the headlines again. So, this is a great time to welcome to the studio David Roberts. He is Head of Fixed Income at Nedgroup Investments. Thanks for joining me today.
So, when I heard you speak in June you said that you have been tempted out of retirement by the excitement and the drama of the bond markets. Can you give us a little bit of a rundown of how that [happened]?
David Roberts: Yeah, that's true, James. So, the first thing was it's always good to be invited back and for me it was important to find a platform that I wanted to operate under, and I've been fortunate enough to find that. But the other thing, yeah, as I mentioned in June, was that a couple of years ago bonds to me just looked like an accident waiting to happen and I decided – I took my own money out of the market. It wasn't appropriate to be selling that type of product to clients. And it was very clear that I would only return if I thought there was an opportunity for clients to make positive real return and lo and behold here we are today.
Gard: Sure, great. So, you said at the time that markets were a bit complacent perhaps about inflation hanging around and interest rates staying high for longer. It looks like you've been proved right. Have the markets got caught up with this higher-for-longer mindset?
Roberts: They've caught up, but I don't think they're entirely there yet. We still hear a lot of rhetoric in the market in the press about generational opportunities to buy bonds and how people are going to make 10%, 20% next year. But certainly, from my perspective and I think also if we're reading central banks correctly, which is always a dangerous game, but if we're reading them correctly then it's unlikely we're going to see a collapse in interest rates anytime soon. So, I think those expecting double-digit returns could be slightly disappointed.
Gard: Sure. So, you've described your approach as kind of sticky beta. Can you give us an idea of how that works and how an active manager can add value in this sort of market?
Roberts: Well, we're obviously in the process of going through a fund remit at the moment prior hopefully to launch. What's apparent to us is the opportunity for clients, which sometimes fund managers forget it's all about the client. The opportunity in the core part of the fixed income market is as good as it has been for a couple of decades. So, a core portfolio of investment-grade generating inflation-busting returns, that would be our view. And then, as we said, if central banks are tardy in reducing interest rates, if inflation stays sticky, it's likely that we'll see the bond market return 5%, 6% per annum, maybe on average, but per annum for the next five or six years. So, that's what we mean. You're not likely to see that big spike higher in price and lower in yield, rather perhaps – and this I think is where the market is still not quite in the right place. It's going to be a more gradual measured return over a period of years.
Gard: Okay. That's kind of good for investors really to have a measured return rather than volatile returns.
Roberts: That would be my view that – again, we should also remember I think that it's unlikely any investor has 100% of their assets in bonds. So, we're generally talking about part of a portfolio. And I think bond investors and indeed many fund managers got sucked into thinking of bonds as just another growth asset when we went through the QE period. Whereas today, I think we're back to that almost pre-2008 period where there's a good chance that bonds and equities will be negatively correlated, that bonds can provide that stable foundation, I think that value platform if you like, and allow investors to do more aggressive things with the rest of the portfolio. So, a bit of certainty sometimes never hurts.
Gard: Yeah. So, going back to the bonds' traditional role rather than…
Roberts: Yeah, and it just strikes me as I say when I look at some of the rhetoric in the market that people are – there's a suggestion that that's not the case, that bonds will post supernormal returns again 2024, 2025. I mean people were talking about that a year ago, was 2023 being the year of the bond. And lo and behold, it didn't come to pass. And when I look at the outlook for the global economy, as you say, the stickiness of inflation, a strong consumer, a strong labour market, it strikes me that they're getting too excited in the short term. It's probably wrong. So, yeah, a measured return over the next two or three years to me as the kind of base case.
Gard: Sure, yeah. So, one final question is a lot of headlines at the moment about bond prices falling. Should investors be worried about falling bond prices?
Roberts: Well, if they're not invested at the moment, it's an opportunity. In terms of the likelihood of a further fall in price, again, I still think that the – people talk about optimal entry point, and I do think that there's a possibility we see yields a little bit higher in coming months, so lower prices. But that has to be offset with the current long-term opportunity. And as I say, if investors are comfortable with the notion of 5% or 6% per annum as that value return in the portfolio, I wouldn't be too worried about short-term volatility. Today looks quite a good entry point, if not quite the optimal one.
Gard: Okay. That's fascinating. Well, thanks for your time, David. For Morningstar, I've been James Gard.
