The prospect of a Brexit and a presidential victory for Donald Trump would not create the market catastrophes many people are envisioning, blockbuster bond manager Laird Landmann has said.
Speaking to Citywire Selector’s sister site Citywire Italia, Landmann, who co-runs the $75 billion Metropolitan West Total Return Bond fund and its Ucits-compliant mirror TCW Met West Total Return Bond fund, said even a vote to leave the European Union may not be as volatile as feared.
Landmann said the vote to leave and the actual act of leaving are two very different things and he envisions a scenario in which the UK government slows the process considerably. ‘It may simply drag its feet, not really outlining how it intends to withdraw,’ he said.
‘The odds of it actually happening are really, although, having said that, there are wider implications. This could signal a rise in structural tensions throughout Europe, which could form the basis of the next crisis. This is perhaps why policymakers are being so paternalistic at the moment.’
It is second only to the Pimco Total Return fund and, according to Citywire data, was one of the biggest selling funds globally over the first quarter of 2016.
In a very similar way to the Brexit scenario, Landmann said the possibility of Donald Trump becoming the next US President could be less of a shock for markets than previously thought.
‘I cannot speak as an expert on politics, but what I can say is that, just as nobody wants Brexit in London, nobody is really in favour of Trump in California or New York. But then the ‘centre’ of the country is something different,’ he said.
‘The point is that I don't think that Congress will be likely to cooperate with either candidate, even if we have a Republican president in the form of Donald Trump,’ he added.
‘The separation of powers was designed for this reason, so, let's be clear, we will not have a wall on the US border with Mexico, or other things that he’s promising. The market could be scared if President Trump started to tinker with the Fed, however.’
In terms of asset allocation, the TCW Met West Total Return Bond fund is heavily invested in the US, which Landmann stressed fortunately has positive rates.
‘Nonetheless, I think we are troubled by current investing. We've reached a point where leverage has increased dramatically throughout the system, especially in emerging markets and high yield.
‘Incomes are declining, there are bad industrial production numbers, and we are seeing warning signs in earnings throughout the US economy that seem to signal we are reaching an exhaustion point in the cycle,’ he said.
Investors need to be careful, according to the fund manager, because the markets will face another down turn again soon. ‘That will happen eventually, February and March were warning signs. At that point you will probably want to start buying investment grade corporates, maybe some high yield corporates as well, as they get cheaper,’ he said.
Focus on value
As the oil price started to rebound at the end of April, some US energy companies, notably those in the high yield market, turned profitable again. Some commodity managers, who bought those corporate at cheap prices in the previous months, realised good profits.
But that’s not the job of a value manager, stressed Landmann, even if he can find short-term gain. ‘The job of a bond manager is to buy cheap bonds, whereas the job of a commodity manager is to determine when the price of oil will go up and down,’ he said.
Landmann highlighted how, as the prices of high yield in February and March went down, if oil had stayed at $30-35-per-barrel, most of these companies would have gone bankrupt.
‘That's why we didn't buy them, as we are value managers at the end of the day. But if these bonds go down enough and we don't have to depend on the price on oil bailing us out, we could own them,’ he said.
The TCW Funds - Met West Total Return Bond fund returned 6.5% in US dollar terms over the three years to the end of May 2016. This compares to a 8.9% rise by its Citywire-assigned benchmark, the Barclays U.S. Aggregate Bond TR, over the same timeframe.