Fixed Income Masterclass | October 2018

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  • 43 mins 20 secs

Is bond market armageddon just around the corner? Listening to some market commentators you could be forgiven for thinking this is the case, especially considering that favourable monetary policies are starting to reverse. But which asset classes within fixed income are most vulnerable and where are the opportunities? On the panel are:

  • Roger Webb, Deputy Head, Sterling Credit & Aggregate Funds, Aberdeen Standard Investments
  • Nicolas Trindade, Senior Fixed Income Portfolio Manager, AXA Investment Managers
  • David Zahn, Head of European Fixed Income & Manager of the Franklin UK Gilt Fund, Franklin Templeton Investments

Learning outcomes:

  1. The investment case for UK gilts
  2. How to generate returns in a rising yield environment
  3. How to find the best ideas across the global credit market

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Hello and welcome you watching asset tv's masterclass and meet jenny alice today. Looking at fixed income well, is bond market armageddon just around the corner ? We're listening to some market commentators. You could be forgiven for thinking that this is the case, especially considering that favorable monetary policies are starting to reverse, but which asset classes within fixed income most vulnerable on where the opportunities well, i have a panel of three experts with me today to discuss. They are roger webb, deputy had sterling credit and aggregate funds. Aberdeen standard investments. Davidson, head of european fixed income. A manager of the franklin uk guilt fund, franklin templeton investments. Nicholas turned a senior fixed income portfolio manager, access, investment managers. Right, roger, i'm going to start with you, and i want to start with the overall investment environment, and i was, like, mentioned in my introduction, some people are worried about this so called armageddon in bonds or to your thoughts on this ? Yes, it's certainly an interesting turn of phrase armageddon in all markets. I think this has certainly been mohr challenging than we've seen for some time now we're obviously in a period of policy ton, monetary policy tightening, especially in the us, and we've seen that policy tightening take place for a couple years now, with almost three years, andi this year we've had obviously trade wars come to the fore we've had problems in italy, political problems in italy come through as well. Earnings have started tow, potentially roll over in certain areas the us most recently, so people are a little bit concerned about the environment for fixed income, in particular, where the policy where policy rates may go too far, especially in an environment where we're easy monetary policy that you mentioned in your introduction that being bond buying programs from central banks have ended or our ending gradually it's a more challenging environment. For football markets, i think probably market's been a bit surprised by that. The raft of events have taken place this year and volatility has picked up, but probably more surprised by the lack of volatility is seen for the last five or six years rather than surprised by volatility picking up all of a sudden that we've all been around long enough to have seen volatility in markets, i think we should be able to cope in this environment obviously rates again to continue to rise in the u s we expect that to happen two thousand nineteen, but the environment for some asset classes and we can talk about those great credit, for instance is still quite constructive in my opinion on david, your thoughts looking at this very much uk guilt perspective mean, is this a concerning investment environment for uk ? Gilles well, i think you get kilts are part of anybody's portfolios kind of bedrock is something that i will offset when other things aren't working quite a swell, innit ? But i think what we have is with the volatility increasing as we've heard and uncertainty increasing due to things like brexit or trade wars et cetera, i do think the active management and guilt to become more and more important as you will see volatility within the market if you're managing the activity you bill, take advantage of that it's very different too. If you buy a guilt at one and a half percent yield at the beginning of the year at the end of the year, it's so one and a half you get one and a half, whereas if you traded through that, you can actually add value. Close your eyes so far it doesn't anything has definitely being a challenging environment for fixed income investors, but i think what we've seen this year is actually a healthy correction fixed income markets because i think we started the year as sustainable, low level of yale's intact pretty spreads in the thing's, not the market is a much better position that we have higher yields and in water. Chris frates unfortunately, i think that the whining it's fred's off the rise in years has further to go in in two thousand nineteen were definitely in a better place now than we were a year ago and to go on russia's point i mean that's. True validity has definitely increased this year, and i think the low level of electricity that we saw in two thousand seventeen was abnormal and you know what we expect to see is a structural shift towards higher volatility, you know, over the coming years because of the withdrawal of liquidity by central banks, because in the increasing interest rates globally, yeah, on david reiter, as we've mentioned, they are on the uptrends what is this adding to the mix whatyou pricing in when it comes to this ? Well, i think when you talk about rates is very difficult to say they're on the up train because i think that in the us are they going to continue to raise rates ? Yes, of course they are in europe, are they're gonna raise rates ? I mean, our own view is that probably won't raise rates until twenty twenty, twenty, twenty one, so i don't see a rate rise coming out of europe anytime in near future on the uk again, i don't really see ray rice is coming and the the central bank has said that they will maybe raise two or three times over two, three years, so i think we'll all be very gradual, and i think that people have gotten very used to this low volatility environment as you see volatility pick up, i think people will return to rates and they'll say, i know the rates are low, but this is something that is relatively stable in my portfolio, so i don't think rates are going toe shoot up as much as maybe some people think, especially in europe, okay, roger's so if volatility is picking out, what sort of assets and most affected then in the fixed incomes for much depends on on how much volatility volatility picks up on dawn, the pace of rate hikes that day was just touched on the fact that rates in the europe don't look like they're going anywhere, and we don't think they're going anywhere either. We think i think ideally they would have gone up before and then be in a better position tease policy again in the face of weak economic activity asset wise, if rates were to go up in the us much fast in the markets, county pricing in the dollar appreciates, then you clearly don't want to be in the higher beater asset classes. Emerging markets naturally high yield potentially, but if we continue the part that was saying at the moment and rates continue to rise gradually, economic activity in the u s continues to be fairly robust then, and i think those asset classes high yield in particular, which has re priced over the last few months, is starting to look attractive, not not cheap by any stretch of imagination on investment grade that i mentioned earlier, i think investment grade spreads having re priced, are relatively attractive in that environment. Normally in the rate hiking cycle such as the one we're going through now wi see many, they are so shallow is that is the one we're statement normally, when rates policy rates are rising, investment credit does quite well until it stops doing one until at the end of the cycle and economies turned over. So we see economies actually turning over and looking like they might be moving into recession. I think credit assets of reason be attractive volatilities still persist, so then what's the best ways to generate returns in a rising yields environment quiet depends on the path of rates and how quickly they rise, but i'd say we have been for some time looking at shorter duration opportunities. Floating right nights through two thousand eighteen have performed quite well high yield has stopped performing quite running that volatile moment we've seen recently, but would normally perform quite well because it's, a short duration asset class shorter rated credit so short dated credit funds have bean gathering assets quite quite significantly over the past two years, but for letting the more flexibility that you have in your mandates, the better i think that's the key you look a sectors like the strategic concept that's gathered significant amount baskets over the last few years because our clients have bean looking for opportunities to hide from those risks that we're talking about. Today. Nicolas, you do a lot with short duration what's the argument for short duration in this environment we find ourselves if your expectations for higher yield an obviously short duration is one of the best best to be within fixed income, because by having inauguration, you have a lower sensitivity to rising deals, so that means that you have a natural protection against seniors, but i think going global in the ability to go global is also quite important to make sure that you have a large opportunity said when it comes to investments and have the flexibility to go across the classes because what we've seen is maybe more the correlation of course, as the classes that we have for example, in two thousand seventeen where everything was moving one way and having the ability to allocate to government bones investment grade hide in emerging markets give you the flexibility to potentially minimized rodin's within your portfolio minimized relativity was still maximize of risk adjusted returns. That is a thing that is something that is very, very important of con environment, because it's very difficult to know whether next question's gonna come from is it going to come from the eurozone with italy ? Is it can't come from the uk with brexit isn't going to come from emerging markets with the big turmoil that we have in that in america ? Or is it going to come from with the u s with the midterm elections were no, democrats may take the house and the senate so it's very difficult to know and that's what being really well diversified. It's very, very important. That's exactly right. And we've got environment i touched a moment ago where europe isn't doing very well at the moment the economic activity levels are falling and rising thie us, on the other hand, is still doing quite well. So being ableto to move in terms of credit markets within those asset classes is one thing us looks more attractive to me than europe does for the time being. But thie opposite is the case for me and david's markets and rates markets that i think us yields could continue to rise. But european yells with the exception of one too one or two key countries that we could talk about looked like that may well be quite attractive at these levels. So how best then to protect investors against rising yields ? Why don't you take that, david ? Well, i do think the diversification argument and being told to invest outside of the core asset class and maybe the funding strategy looks that is quite important, so being able to go into other government markets besides just uk producing currency, i think it's also another area, but i think what's really going to differentiate fixing commanders of the next couple of years. Is being active and being able to be quite flexible and being able to change their view quite quickly. It's not the type of market where you can get a hold of you for the next three years you credit spreads going do this it's going to be we're going to get volatility is going to increase and its going present opportunities. If you have the flexibility to take those thin, that will benefit your investors. Well, look it fixed income, roger. It does seem expensive at the moment, and perhaps it isn't a good time the cycle for it. So why should investors hold it ? What's the argument necessarily share the view this expensive. I think you'll czar policy rates are likely to rise. I think the strain in the u s will be taken that short end of the curves longer longer us yield three three and a quarter necessarily attractive. But to give you some opportunities, investors, whole fixed income family for for the income, for the income you can generate from from bonds. And i think that's going to continue to be the case we can. All all three of you taken generate income for our clients without extreme levels of capsule volatility, which is what we're trying to do at the moment, what we're all trying to do is preserve capital from our clients whilst continued to generate income, i think the key will be, however, that those levels of income that we generate our lower and have been lower for some time. So i think that's what that's, what investors are looking forwards, income levels and they'll continue to do so. Everybody has to hold some fixed income. Maybe most clients we speak to hold less fixed income now, and they have done for some time which is the right trade naturally. And as we re price these markets, perhaps they'll move back into fixed income. Nicolas the same fear is it capital preservation income for investors ? Definitely. I think the last couple of years fixing come crib is seen as an asset class for for capital position. But i think that is gone. Unfortunately, a nice, more about capital preservation when it comes to fixing some assets on i think the other argument phoning fixed income assets is also from a diversification perspective. I mean, just look at this year, i'm iniquity markets. Are done, you know, high single, digit low, double digits here today. And if you look at you fixed income assets, particularly if you're in the situation space, you could still be slightly positive, so obviously, you know, but having some fixing come within your routine said before you, you benefit from the diversification, and obviously if things get really ugly and we get a big risk ofthe environment, then you know, duration will do really well on environment and fixed income assets should also do really well, and that will help you over performance, because there has been the concern that the equities and bonds of sort of moving in parallel killing that diversification argument, but this isn't what you're saying is what i mean, it's a big blur, to be honest with you. I mean, maybe like, ten years ago. I mean, very clearly you have the big, you know, if you have the risk ofthe environment, you know, yields will drop in every city. You will benefit from the diversification argument. Withholding equities and fixed income issued the environment is that basically where an environment where some problems arising in raising interest rates and liquidity is being withdrawn. So obviously that put up what pressure on heels, but i still believe that to some extent, duration has a zits place in a risky environment, and we've seen that over the last couple of weeks we had a risk ofthe environment in the us and treasure is perform really well. It is not clear, probably ten years ago. Okay, so let's turn to a couple of year questions now, how do you reconcile the need for being active in fixed income on the diminishing liquidity ? Roger, why did you take ? I think they're probably the facts related that liquidity is obviously the keeper for all of it has been the case for his post global financial crisis. Liquidity has has more or less dried up at certain points in credit markets in particular, but being able to be active and move in and out of of specific credits where especially in the environment we're looking at now, where economies might may begin to slow and credit events may may pick up. I think the act, if there is going to became being able to trade in and out of credits that we change our views on is going. To keep going forward. And yeah, i mean one thing also you can do to make sure that you have a good level liquidity within your part for us to figure out the way you structure your portfolio, for example, in the adoration, perfumes that that we manage, we have on average, about twenty percent of the profit maturing each year, which means you have a natural layer of liquidity within your part for you because, you know, there are about twenty percent of part for well matter on an ongoing basis that is very powerful because i know it was you to be active at the lower cost on one thing. Also, that is not necessary talked about a lot is the father. When you're part of the biggest manager, you know, you manage a lot of different assets by mountain entrance money, etcetera and there's always a lot of things going on somewhere in the business, which give you potentially the opportunity to tread internally with over colleagues within the company. And obviously, you try that meat, so that create another layer of liquidity. That is something that can be quite interesting on level competitive advantage in difficult market conditions and david, you told me earlier that got markets, they've been quite static, but this might be starting to change. So you are advocating why active management is is important and capitalizing on this way have been in a bull market for last thirty years. Basically, gilt yields just wrapping you declined. Many people saw it as their safe haven. That was their insurance against everything else, but it paid them really well, it's great for your insurance to pay you. I think now we're getting to the point where this volatility you are going to have to be more active and you can't have significant drawdowns and your capital if you're not careful. And so i think that's, why you need to start looking at that, but not just get rid of the asset costs ? I think you just need to look at it a different way. Another viewer question do you see the mutual fixed income funds offering daily liquidity being a potential issue ? Nicolas, your thought, don't it matter more a matter of what kind of assets who invested into ? So if you're invested in this margaret, for example, it tends to be highly liquid. Something you know, here you will have less issues is, for example, you are more invested in his atomic asset classes. You may struggle basically to too many more that that that that really liquidity i said early on, you can do think structurally to improve the liquidity profile of your portfolio holding more cash. For example, if you feel that, you know potentially, you could face more redemptions having more both mattering on an ongoing basis. So, there's a lot of things that you can do to try to to meet you get really liquidity issues potentially so let's. Move on to valuations now, nicolas. I mean, where are they looking at the moment ? They cheap, but they stretched me. What ? He's seeing and high yield people have said that's reached him eye watering levels. I mean, concerns on this. I mean, if you look at valuations right now, they are more attractive than you everywhere. The beginning of the year. That is simply because, you know, suppressive widen across the board and then us highlands, the last class due to perform this year because we had a really strong run up to probably two to three weeks ago. If you look at value meaning no investment grated can environment it's still attractive ? I think because the last thing we want to do is over extend ourselves because we're not sure how far we are from the end of the economic cycle, and obviously when you start thinking about the end of the economic cycle, high beat asset classes like hell, you will starting on the form so we still want to own, for example, somehow you because we like the curry element, particularly on the short end. But we do not necessarily want to be overweight high yield at this point in time, because we're just afraid that at some point the market will turn and when he turns is going to be really hurt. I mean, it's going to hurt us, too, to be overweight, high yield. So we want to make sure we have space in the populace toe at risk and officers first stage down the line. I want to stay close if we've become more positive on his imagine markets obviously is gone for quite a tough patch so far this year, with some pockets of values we believe in, imagine market it would. Be incredibly heading back to image market so roger, as we reach the end of the cycle, do you think we're likely to see more default rates in corporate credit ? Yes, certainly high yield one typically would expect defaults to pick up way reached sort of the end of the cycle and and start to look at the comics later. Leveraged levels are excessively high, however, have in certain areas of the high you market, there are pockets of excessive, excessive leverage think big risk for high yield. The reason companies fall over is their inability to refinance rather than the fact that there, apart from the obvious ones, the basket cases that deformed from time to time, but they can fall over through any part. The economic cycle is that ability to refinance it's going to be the key going forward and as we get to the point where high your markets have to refinance, which is on a regular basis, depends on where, where, where yields bond you government bond yields and online government manuals and where policy rates are, i think, as long as we think that yields aren't going to be rising to the level that we saw three previous previous cycles which we don't at the moment, and i think that the risk of excessive defaults isn't isn't material divorce will certainly pick up if we have an economic slowdown, this question, but not to the levels we've seen another cycles just because of those terminal levels of policy rates that we're likely to see, which won't be its highest previously and david looking at some of the risks for uk, gilles and i think we have to mention brexit, it's coming up very quickly and how you positioned for it down time well, i think that brexit is obviously a big issue for everybody and for all fixed income markets, i think it really comes down to do we have a no deal or do we have a deal ? And if we have no deal, then guilty lt's probably revisit sixty fifty basis points on the ten year if we have a deal, then we could easy go above two percent and so i think that that in itself shows you why you need to be very focused on that asset class more so in the past, where it just kind of was a little bit lazy, like a better word and so i think we're defensive, we think they will come up with a last minute deal, but there is always a possibility that they won't. So we're running short duration in anticipation that there will be some type of fudge deal done and then they'll move forward. There's also a leadership challenge, is in the uk to think about a potential corbin government so thiss sort of thing, i mean, what you pricing in there, what sort of impact might that have on you can't get well, the gilt market isn't pricing anything about a labour government, and so i think that is something that would be a real problem for the guilt market if they were do move forward with many of the policies that they said they want to do, but of course they're in opposition. When your opposition you say some things you don't necessary do once you get into government on dh so if that was the case in our respective years ago, higher, very quickly and again that's probably an environment where you need to be able to move out of that or change your stance incredibly. Fast, like in a matter of weeks. Day's supposed to. All right, i'll do mass allocation at the next quarter. What is interesting is, actually, if you look at the credit market in particle understanding, credit market has been some sectors that have been actually under pressure because of the because of the possibility of a labour government. And i'm thinking, for example, that the utility sector, because of the risk of necessities, naturalization for the sector or the transportation sector that has also been called a lot of pressure this year. Yeah, something that's kind of a dick otomi here, that's probably what's happening in the guild mark. And this is the credit market, which is, you know, for seeing some kind of risky, exactly. Well, earlier, we had a question sent in by men. Usually, say let's, have a quick listens, what he has to ask. Does the macro view matter in a fixed interest world rising interest rates or allow about informants picking ? I think it's still matters, but i think right now, it's important to have a bland off abdomen bottom up because, you know, you still need to make sure that you get, you know, your interest rates called right, because there will be no impact the level of years, which obviously is one key component of returning fixed income assets. But what we've seen this here's a big increase in negative single name stories i mean, we had a lot of names of blew up this year that hasn't necessarily happened over the last two or three years, so you need to make sure that you get your bottom. But i'm a pre such right that you get your credit selection, right ? Because that can really, really hurt performance because we had some nice this year that dropped twenty points. Even investment brand names dropped twenty points, so you need to make sure that you get your credit selection, right ? That's ? Why ? I think that kind of environment active being active is very, very important because if you on the index, you are all the names you don't make any difference station between week names and strong names ? And that is something that i think it's it's not right in the cunt environment ? Well, we've had quite a few of your questions come in again, so i'm going to put these to you. So index linked corporate bonds have had quite a good year what's your view in respect of index linked through the score card indexes. Corporate don't let markets quite thin in reality in the uk, there are a lot of bonds out there and they're not not a huge supply bonds but we have got to point where we started pricing high rates of inflexion risk in the uk and politics. Sorry inflation rates are above the mp seize target. There is demand for those assets is well, we've seen recently a big pickup in demand for long dated notional and normal and inflation linked bonds and that's really being driven by pension funds, insurance companies that are demanding those assets. Another question, should jails continued to remain securely low rather than rise due to the global levels of private and public det ? Nicolas, why don't you take that ? You can't that's true, that is a high level of debt right now in the private sector, in the public sector, on dh that obviously is going to put a campus to how much i think sometimes will be able to raise interest rates off over the foreseeable future. Eso when it comes to us treasury years, we think that we're getting quite close basically teo, to the high off us treasury yields now when it comes to the eurozone, as we discussed earlier on, we think that the baby's going to struggle to raise interest rates and bumi is potentially was quite low levels for the foreseeable future. I think some things are aware of the big level off the high level of debt that is currently out there and obviously what they really worried about is that if the market turns around, obviously a lot of companies will have to refinance and if that's too high a lot of companies beautiful because they won't have the ability to refinance. It is, of course, a big issue for the higher your market and one final question which income assets can be most affected by the negative technicals over the next six to twelve months. Who wants to take that ? Anyone jump again ? Roger. Negative technicals, i suppose, the that the asset classes that have bean those that central banks have bean owning through their policies in the office had a significant bond buying program owns a lot of corporate bonds in europe that is gonna be impacted technically, by that that's that the reversal of these policies over the coming months and years that being said, i think there is quite a lot of cash on the sidelines in europe waiting for high yields, which may or may not come through as we just discussed, which will be put to work as overtime insurance and pension funds i just mentioned have to put that money to work and are seeking income and duration. So i think the risks of those technical asset the most technical at the moment is investment grade credit in europe. Because of that policy, the issue a lot of people like to talk about it if it affects the high your market in particular, if there is a big shake out of the high yield asset class driven by collapse in equities, for instance, then then i suppose that market becomes quite technical quite quickly as well, because there will be rotation out of high yield as a result. I think the other area that actually has a technical too it is boons in europe, i mean, people say yields are so low they can't go any lower, but remember, the already owns twenty five percent of the market and they're going to continue to reinvest in it, and the german government runs a surplus. So actually, they're fewer boone's every year, and yet that is the the safe haven in europe's. I do think it kind of gives his technical dimension that probably keeps those yields lower than one would normally expect. Okay, so let's look a little bit more about your stress use now and david, you know, started considering the investment environment we've covered. I mean, what what's your strategy for, i think in a gilt portfolio it's being very defensive. It's basically saying we want to trade the range is that we are in the market the moment we have relatively occur. Flattener on in the portfolios who have more longer dated bonds is that does have that bid from the insurance companies, et cetera, but overall are duration is quite defensive, so we're about two years short of duration when we do move around that duration quite aggressively and that's where we think will add value. But we are looking for other opportunities in europe maybe where yields get to a certain level on different governments where we might say actually relative to what you can get in the uk gilt market, that might be interesting, especially in a hedge basis, because obviously hedging out of europe into the u k you, you've earned quite a bit extra because you can you mean your phone can invested twenty percent of its net asset value in government bonds of other nations mean, do you utilize that fully or not so much ? We haven't utilized it so much so far just because we haven't needed to, we've been able to actually get quite good return by focusing on the gilt market guilt mark has been volatile enough for us, but i think we're looking for the opportunity obviously run large european portfolios, we look at that all the time anyway, so it's a natural progression for us look at where they're opportunities. In europe, or maybe in emerging markets where we can put a little bit in to those toe help diversify that guilt portfolio on roger, you're sort of strategy going forward. Yeah, so this year we've been generally short duration, which is a common theme because its rivers short of interest rate risk through a number of markets, but namely, the us in the uk in particular on dh modest, long of credit on modest, longer credit hasn't paid off this year is yet, but it gives us being the only modestly longest allowed us teo increase that exposure to credit markets. In the cell of that we've seen through october, for instance, we've been started to pick up risk within credit a couple sectors that we've a lot one that we've long bean long off. If you can say that has been the financial sector, banks and insurers, banks in particular have bean we all know bean shrinking their balance sheets, drinking their businesses, improving their balance sheets, improving the quality capital the balance sheets. So it's been a long term improving credit story with valuations debate that's attractive ? Insurers let's say, because insurers bean much more volatile bond. I really don't see the evidence so they didn't obviously have a particular bad crisis so therefore they don't benefit from that. The regulator impacts through the recovery so that's that's one sector that way a little bit longer for some time and has paid off has paid dividends until two thousand eighteen, where volatilities picked up the other one's energy. We can't really buy the energy sector in uk dom assault fund's going back two necklaces point earlier being able to globally diversify move into the energy sector, which is predominantly in the year by the u s a u s dollar credit or emerging markets has been one that has paid dividends over the course of the year. As the oil price is appreciated, we've managed to catch them value from that trying to preserve capital. It goes back to what we talked about earlier on preserving capital in this environment has been the key. We've done a bad job on that, we've had some credit risk, we've now got opportunities, teo extend that credit risk if there is further volatility and of course you invest globally. But how do you find the best ideas across this global ? Landscape especially too, you know, downsides, wail working and in global firms and having skilled global colleagues. The key they're having boots on the ground in the us for us means that i can access solid credit solid names that have bean well researched by my colleagues in in our offices in the u s we've got the same capabilities in asia and australia, obviously as well. So that it's, having those guys in those other jurisdictions of other regions, be keen to get their ideas into our portfolios sets it's a case of mutually selling each others. We're selling our products to them and hoping that they'll provide us good ideas. Having boots on the ground is the key to that door think being able to research lately by thin rates, markets and the credit markets is is essential for his all going forward and that's peculiar case for the us market because us market is very different from the european market. But on the credit side, there's a lot of names, just issue in dollars on having no boots on the ground express on the ground is very, very important. No on what are you finding up agencies ? And what's you avoiding esso in our global fundraising strategy right now we are quite conservative ity position so we are all the white invest margaret and slightly underweight high yield in emerging markets overall within investment grade, we liked us investment great understanding of this mangan markets we think they were awful good value, particularly at the shop. So that's where we have the tobias and weave in the higher than imagine mark it's, okay, that we are on the wait, we have a best was emerging markets because we think that after the sale of that we've hade within this year imagine markets are started to become more attractive, so we've been gradually adding to emerging markets. So, david, how would you say uk guilts compared to, say, us government bonds or even in europe ? I think you tend to have quite a high correlation with us treasuries. So treasury mark, at least in short term moves and usually guilts followed quite closely. I think that one of the areas that people have started to focus on is the hedge yield of u s securities. And so if you look at the us treasury is yielding for round. Numbers three percent. And then you had it back. Tio on the uk you lose about two and a quarter two and a half percent to do that. So you actually end up with something building you fifty basis points that's a similar credit quality guilts. Whereas in europe you actually pick up the hedge. So i think that in europe is really the opportunity. I think, for global investors hedge back into the either the dollar or into the pound. Those are some of the opportunities were looking at. I think what we see everywhere except for in the u s is that really holds the negative. And so if you look at the fundamentals, none of these bond market should be at this level. Yield should be higher. But we're not just being driven by. Fundamentals are being driven by politics. Were being driven by risk. And so that's, really ? What i think is driving rates. Markets at the moment. It's not what is gdp ? What is inflation ? What is this particular central bank doing ? Is everything else. You really have to look at the whole encompassing package on roger. Look it talking about some of the sectors. You mention before you've touched on energy, but also you're quite your liking some banks. Which ones do you like ? And also think about the recent example we've seen that happen ? Teo thanks the bank. I mean the money laundering scandal there. How do you manage something like that ? If that happens, toa something you're holding that was quite an interesting one. Really. The providence of that came around the financial crisis, dance, comport banking, estonia's problem now that that it integrated into its business but didn't fully integrated into all its platform. So it became a risk management risk control issue. That dance school was he took his eyes off the ball. It had other things to worry about island in particular, it was a problem. So having not integrated dance school onto its onto its risk management platform, it came across the problems. Despite warnings from far afield of the bank is the central bank of estonia, the central bank of russia as well. I did warn them about the tension, she said is one of those it's quite difficult to manage, but what do you look for going forward ? You look for acquisitions, very act inquisitive institutions. And you challenge them as to what they're doing, officer. A natural question, given what we've just seen me dance crews, have you integrated, said acquisition onto your risk management platform. What are you doing about risk risk control within these jurisdictions, you probably look at where they're making his acquisitions clearly need to look at the balance sheet. The ones we like rvs in the uk is about that done a lot of that chopping the wood, i suppose, post the crisis. They shrunk their balance sheet, materially improve the quality capital on the balance sheet, they become a much more uk focused commercial bank. Return on commercial banker should say andi look very investible from a credit respect from a corporate bonds perspective elsewhere, credit suisse looks like right moving towards meena ups equivalent in switzerland. Some of the italian banks we don't really have. The italian spanish banks were still not involved in because the non performing loans issue this is ongoing in italy in particular, on the political issue there and then in the u s i suppose the big banks j p morgan's office one that stands out very sticky deposit base people start to get worried in the great hiking environment we talked about about the stickiness of deposits. There is a movement is quite competitive environment for deposits in the us. Because it's, moving from bank to bank shaping always got very sticky and huge deposit based camera line shows up the balance sheet. But i think i mean the example of that scumbag. Just distress hind part on diversification is within a fixed income part for you because, you know, you could be easily tempted to put five percent off a very strong bank of very strong cooperate. But you never know what may happen. Maybe in that. Counting fraud. Something maybe happened ? That's what ? Diversification is very pot on the sugar level. Make sure that you're not over exposed to one single the show with you part for you that goes also four sectors and regions. Because what ? You tend to see that when we had the diesel get suddenly the whole lot of sector was acquitted. Nothing must reading within the sector. Having a finger. A multi dimensional diversification is very, very important to make sure that you know humanity liquidity within your part for you. Because we don't spank. It's obviously was one of europe's most prestigious bank. So how is this that impacted investorssentiment buns ? Is this get noc for them ? Or you mean what you see is all the scandinavian banks have been under performing on the back of it ? Because suddenly you think if that happens, desk banking may happen to evan scandinavian banks that have some entities in estonia, for example, and then suddenly there's a witch hunt going on with the market, trying to find out which all the bank could be could be in trouble. And so, that's what ? This diversification argument is very, very important and that's in an environment with extremely strong regulated regimes is good is that that we have in the uk and the way they were it's, almost guilt, guilt edged is that's kind of been banking system and dance crew in particular was held held in very high regards, so it's difficult it's difficult to assess the risk but i think obviously going to depose you can diversifying that nicholas is just talked about is clear and obvious from the liquidity perspective and from the credit quality perspective as we've been talking about today, we don't have a great deal more time, but just a few more questions and david one for you and just looking at the future of u k guilt i mean what's your outlook moving forwards, considering we've got brexit and all this sort of thing and on also just once again just to summarize your case the uk guilts why should investors the intruder ? I think that theo outlook for uk guilt is very uncertain, i think that's the biggest thing i can say that i can draw a scenario where we could be at fifty basis points in the years time i draw one where we could be at two and a half percent in a year's time, and i think that it is being driven entirely by political events. It's not being driven by fundamentals at the moment. And so you really have to be quite light on your feet as faras changing that. But if i think if i had to say where i think well, we beheaded is it probably yields will go higher modestly higher, not a lot, and i think that that's probably how you want to position your portfolio, having a short duration posture, maybe look to diversify into some other governments outside the uk and really allow that carry teo, help you in your overall portfolio and diversify out your risk your assets because that's what's supposed to be there for it was your credit and your equities and all these other things that tend to move together once you know some event happens. And so i think from that perspective, guilts need to be very actively managed was uncertainty is unknown, but you can have a real opportunity there as well. On roger the role that fixed in complacent portfolio nowadays, is it all about diversification or slighting coming ? Mean what thes factor is clear for for multi asset portfolio as we can provide income, we d provide diversification away from actors if you think about the volatility who talked about volatilities bean most prevalent in equity markets, obviously, as it always is, and that's where i think if you moved towards the end of the rate hiking cycle, we start to think about potential slowdowns two thousand twenty beyond then you'll see more and more volatility in equity markets and that's where fixed income, despite the fact that yields maybe may have risen by then they fixed income does provide protection in then in that environment, diversification is the key, i think income income as well. Yeah, what do you think we'll be shaping things, going forwards ? Well, i think going forward, i think it's still going to be a challenging environment for for fixed income investors because i think fixing convincer will probably be faced with edwin off high yields, water spreads and higher volatility. Andi think that it is challenging environment for fixed income investors, something focusing on well diversified global strategies that can be nimble, i think is going to be very important going forward. I think also focusing on risk adjusted returns also will be very important going forward because we expect to see much more draw dance that we've experienced, for example, in two thousand seventeen that is, i think, something that's going to be very important. That's why i've been discussing with clowns a lot of cars, how did really really well over the last couple of years, high single digit and fixing come and bonds mature profit on material one twenty so you know, there's only so much fixed income can give you at the end of the day, and i think about visiting investor expectations and that they understand that, you know, maybe for the next year or so, it's more about capital preservation of capital opposition because i think something that is very important and roger, i mean, just on that and also, you know, when they look at how investors look at bond's taking the example of test case, for example, that was downgraded to high yield now, it's just going up again, but this was once the darling of the retail space mean, when when a bond like tesco's that can happen to me what ? What sort ? Of impact does that have on investorssentiment material for a big issue a lot ? Tesco tesco's over one percent of the u k investment grade market. When it's downgraded so quite material impact on the whole market, the retail sector in particular it's quite interesting stories, he said. It's now heading back towards investigating one of the agencies, has actually already upgraded because they've done the right thing. They've a bit like banks, they've improved efficiencies, they've cut that cut that cloth accordingly, and margins have stabilized uk marches in particular, sir, but it does have a big impact on any default or any downgrade to some investment grade off that magnitude is gonna have an impact on the market on sentiment itself. So again goes back to the point about diversification, strong credit research, making sure you're in the right right names at the right time and have the right quantities as well. And i think that disco example is one of the i mean, i think one of the most perfect example of the shortcomings off passive investments, because basically you would have on the passive, it would have gone to school all the way to the big. Whining big salafi in tesco bones, you will have basically suffer from the sell off then you wouldn't have to sell your tesco bombs because they felt high yield so he had to sell the exposure and value what i'm not benefiting from big taking expressively expands over the last two three years and probably will go back into the index next year going to your stump and then you will so the passive form will bite back again. They will have missed out on all the tightening that happened in the meantime, that's working environment where you have names, you know, being downgraded toa high yield or suffering some some drawdowns i think is very important to be active in that be passive because when you just end up being the worst thing at the worst time well, unfortunately, almost that time. So i just want to take your final thoughts what you want the viewers to take away from this master class. So, roger, why don't you think i might end up sounding a bit like nicolas without the accent ? Grave flexibility, having global capability, some flexibility to move around the globe in and re allocate your assets. Accordingly, strong stock selection capability that's the sort of thing that we we charge clients to look for inflexible funds is the key there to be able to take advantage of high yields when they come through is goingto enable us to capture value and before those yields come through being able to preserve capital through that volatility that we've been talking about today. So deflecting the more flexible the fund that you invested in nothing, the better the outcome can potentially be. And david, i think it's, just the active fixed income is really going to do well over the next couple of years. I think that there will be a lot of dislocations in the market. There will be a lot of political noise. There will be a lot of ways may be getting closer to a recession. I think that is where active fixed income can really do well and really earn our fees for what our client base and so it's. Really look at what you've had a look at your passives look at your active managers and make sure you have the best active manager going forward. I would definitely agree with him in two. Thousand nineteen will probably be a challenging year for fixed income investors again, and i think, you know, focusing on active, nimble phones that can go global and that focus on risk adjusted performance, i think, is the way going forward to try to mitigate the impact off throw dance and higher volatility. Well, they stay with us here on asset tvs. We've got information coming up on how you can put this master class towards your structured cpd. All that remains is to thank my panel today, so let me give you their names. The game we had. Nicolas trindade, senior fixed income portfolio manager, accent, investment managers, davidson, head of european fixed income and manager of the franklin uk guilt funds. Franklin templeton on roger webb, deputy, had sterling credit and aggregate funds, aberdeen standard investments. So to all of you, thanks so much for being with us and to you. Thanks for watching and see you next time. By the end of this video, you'll be ableto understand and describe the investment case. Vuk guilts. How to generate returns in a rising yield environment, and how to find the best ideas across the global credit market. Please complete the reflective statements of validates your cpd.