Lessons from 20 years in bond markets

It all starts from accepting that the market is always correct while investors are anything but perfect. As a bond manager with 20-years’ experience investing in global fixed income markets, I have three key messages for investors grappling with historic low bond yields and the rising uncertainty about the role that fixed income should play in a diversified portfolio.

The Jamieson Coote Bond’s view is that investors are shaped by their first crisis and for me this was managing liquidity in the wake of the Global Financial Crisis as markets deconstructed themselves. Others will always have concerns about inflation but, either way, the solution is the same: risk management.

Summary

My first piece of advice to potential bond investors is to consider the crisises that have shaped their market outlook. For me, this was the evaporation of liquidity during the GFC, but for many older investors it is inflation despite this trending down as a factor over time. My team spends a lot of time analysing whether policy responses to the COVID pandemic can generate an inflation impulse in some sectors in the medium-to-long term. But, first and foremost, in the short-term there is a deflationary environment to be navigated.

“We’re very imperfect as investors. And that is why strict and stringent risk management is so absolutely critical in making these processes repeatable over time.”

Secondly, I would advise investors to accept that the market is perfect, and — despite their analysis, thematic models and other tools — investors are not. Thirdly, I believe risk management is key. Risk management has always been central to the Jamieson Coote Bond’s process as getting the themes right is often the easy part while getting the timing right is far more difficult. Risk discipline is what ultimately allows a process to be repeatable over time while controlling the downside.

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