James Gard: I'm delighted to have back in the studio David Roberts. He is Head of Fixed Income at Nedgroup. Thanks for joining us again, David.
David Roberts: Great to be here.
Gard: So last time we met, you were about to launch a fund and this year you've launched a fund. Can you tell us a bit about how you've done that and how your year's been so far?
Roberts: Yeah, great. Yeah, we, as you say last time, we were talking about something in theory and now we have something in practice. It's always an interesting experience to go through, building something very much from the ground up. And I think many fund managers aren't really totally aware of some of the detail in the admin that has to go into getting a fund off the ground. And, I would say, all due respect to Nedgroup, they've done a fantastic job to put us in a position where a few months after we joined, we did have a portfolio to take to market. And yeah, so far so good.
Gard: Excellent. Exciting times, right? So last time we met was November 2023 and since then we've had a number of rate cuts all across Europe and in the U.S. Has that changed the investment proposition for bonds? I know yields have fallen, not significantly, but definitely rates peaked.
Roberts: Yeah, I mean, I think it's been an interesting few months. Our view very much is we're in this kind of old normal world, which never get too sucked into QE and zero interest rates. Rather than we expected interest rates always to be at a level which offered value for our investors and maybe we could talk about that in a minute or two. And our view really today is little changed from what it was in November that you really should think about bonds for the long term and not expect maybe 10%, 15%, 20% returns one year, but rather a fairly steady, smooth, a bad word to use, but certainly a smoother pattern of returns than some would suggest is likely from the market.
Gard: Sure. So the bonds still have that function as a sort of volatility dampener in portfolio?
Roberts: Yeah, I mean, I think the last few months have shown that they can for short periods of time exhibit volatility. But exactly as you said, James, if we think of yields today, certainly in the UK, they're not that different from where they were in November last year. So investors have made 2% or 3% pretty much what you would expect really from that core of your portfolio, I think.
Gard: Sure. So in terms of mispriced opportunities, you describe yourself as a value investor. I mean, where you say, you know, I understand what being a value investor would mean for an equity investor, but how does a bond investor, how do you search out things that the market haven't quite got right?
Roberts: So there's, I guess, two things the first is that when we're building portfolios, we're really talking about for the longer term. So we're taking strategic decisions and value there is for us quite straightforward that we want investors to be rewarded or to be compensated to a greater extent than prevailing rates of inflation. So if we think of inflation in the longer term as 2%, 2.5% across the G7, and what we really want from core bonds is a minimum of that type of level. So again, coming back to zero interest rates, if inflation is 2%, all you're doing is throwing money away if you're buying bonds or any other asset class with the prospect of a zero return. And then in the short term, what we try to do is seek some tactical opportunities where markets maybe get misaligned. A good example of the last few months is that the UK government bond market has actually been about the worst performing of the major markets. Certainly where we look to invest in. And the question for us as we approach the budget is now a good time to increase the waiting there, or is the underperformance just a sign of more difficult times for the gilt market to come?
Gard: Sure, yeah, we'll pick up on the budget in a couple of minutes. But I mean, you describe yourself as your key principles are quality and liquidity. As yields fall, do you need to look at less liquid and bonds below investment grade or is there enough within the quality space that you don't need to look elsewhere?
Roberts: We would say the latter, there's generally enough within that quality space. We can play globally. So again, I mentioned the gilt market, it's a tiny percentage, well under 10% of the market that we look at. And generally, you can find relative value opportunities. So when the overall yield the beta, if you like, of the market falls, then quite often that creates alpha opportunities, so the ability to exploit one market versus another. And there's plenty of examples we could give of those.
Gard: Sure, right. So in the next month, we've got the UK budget and the U.S. election. So how, as a bond investor, do you position your portfolio ahead of that? And how do you also keep the political noise of which there is a lot separate from the economic arguments for owning, say, U.S. treasuries?
Roberts: So I guess the political noise, I think it's a very good way to put it, generally is much more important in the short term than the longer term. And if we look at the history of most major markets, both bond and equity, we tend to find that there can be a bit of volatility, some price spikes or falls around about political events and clearly the UK is no stranger to those in recent years. But generally, economics reasserts itself in the medium to long term. So again, we try to look through that noise as much as possible. But to your question, I think, again, we do think about the global market. We can, if we so choose, pretty much ignore the UK, because it's a very small part of our market. But it does still offer us an opportunity. The U.S., in all honesty, certainly in the short term is much more important, much bigger part of the global market, and certainly something that tends still to lead what happens in other jurisdictions.
Gard: Sure. So we were talking off camera about the potential, if Trump were to succeed, whether the deficit would be pushed up, and what that would mean for capital flows globally in bond markets?
Roberts: Yeah, I think that's a very good question. I mean, certainly both Trump and Harris favor fiscal stimulus, just under Republican Party, or certainly under Trump, perhaps to a greater extent. I would say that there's a degree of complacency in markets, and certainly we have to be conscious of the fact that the U.S. could increase its debt burden significantly from here. We're already at a stage where Japan and China are 15% to 20% of the listed global bond market. So there are opportunities for international investors to look beyond the U.S., which for most of my career has been quite a difficult thing to do. The U.S. has generally attracted the vast majority of global capital. So the more pressure we see on the U.S. deficit, the more threat that is to the U.S. ratings, the greater the possibility, I think we could see some international investors moving to other jurisdictions. That's not intended to scare mongering, it's just rather that that's something that we as investors need to be aware of short term, and that potentially gives us the opportunity to add some value for our clients exploiting it.
Gard: I guess it's best to get ahead of potential problems before they suddenly happen anyway. So thanks so much for your insights, David. Let's catch up soon and discuss the bond markets maybe after the election. So for Morningstar, I'm James Gard.
