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AAA-rated PM: the strange challenge for alt bonds

AAA-rated PM: the strange challenge for alt bonds

One of the biggest challenges for the alternative bond sector has been the very low volatility environment despite huge swings in political instability, according to Standard Life Aberdeen’s Mark Munro.

Speaking to Citywire Selector, Citywire AAA-rated Munro, who manages the SLI Global Total Return Credit fund, said political risk had been a big factor for the team last year but it hadn't driven portfolio changes.

‘It did present some individual name opportunities in France and Italy. But one of the challenges, in a strange way, has been the low vol environment.

‘Such an environment of low volatility has been great for risk assets and for overall returns, but within the sector, many strategies including our own seek to find ways to provide strong risk-adjusted returns and explore ways to reduce downside risk when markets exhibit more volatility.’

Munro said low volatility means it’s not been straightforward for investors in the alternative credit space. However, he said the current environment also has some benefits.

‘Right now we are finding the best opportunities in option-based strategies that benefit when volatility rises.

‘We have one position on the S&P 500 that benefits when the market falls but also on the 10-year treasury yield where the fund will benefit if yields break out to the upside or to the downside.’

Edging into EMs

The Alt Ucits outperformer also highlighted the fund’s 12.88% allocation to emerging markets, a sector where the team has capitalised on various sovereign positions.

‘At the start of the year, the strategy had exposure to both Brazilian government debt and select corporate bond issuers. We have since exited the sovereign position as we believe the story has partially played out but the valuations even more so.

‘Today, we maintain credit exposure to select corporate in the likes of Brazil and Mexico. In the sovereign space have holdings in Uruguay, due to stable economic growth and a medium-term view of moderating inflation.

‘We also hold positions in Senegal and Argentina. After being in default a few years ago, we believe recent bond issues will continue to tighten over other Latin American issuers in the year ahead,’ he added.

Risky business

While the team is positive on developments in China, Munro said he is keeping a watchful eye on the country as developments could slow credit growth. This would weigh on industrial production and trade as 2018 plays out.

‘Political risk is never far away and we need to be mindful of its potential to derail markets such as the situation in North Korea, Spain, Brexit negotiations and Italy. Nonetheless, we do not think this is a major risk for next year.

‘The biggest risk to risk-assets in general, and of course in corporate bonds, is a situation where the Federal Reserve is forced to remove still very accommodative monetary policy far quicker than the market expects or is pricing.'

Munro said this will only be driven by the breakout of inflation which is not evident at the moment.

‘The effects of this will be a rise in volatility in markets and a lot of questions around whether this will lead to the end of the current cycle both for markets and the economy,’ he added.

Over the one year to the end of October 2017, Munro returned 3.0% in euro terms in the Alt Ucits - Bond Strategies sector. This is while the average manager in the Alt Ucits - Bond Strategies sector returned 1.1%, over the same time period. 

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