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Bonds can’t offer crash protection, says AAA-rated boutique CIO

Bonds can’t offer crash protection, says AAA-rated boutique CIO

Investors must look for alternative options as the gradually eroding of bond yields and low rates means fixed income has lost its ability to help shelter mixed asset specialists from wider market shocks.

That is the view of Citywire AAA-rated Thomas Kieselstein, chief investment officer of German investment boutique Quoniam and lead manager on the UniInstitutional European MinRisk Equities fund.

Kieselstein said the firm has seen increased appetite for Quoniam’s Global Risk Premia and Alternative Risk Premia funds as investors, particularly institutional groups, needing to uncover yield.

‘The demand is coming amid the low yield environment, so people desperately need an alternative,' he told Citywire Selector.

'In multi-asset solutions, such as a traditional balanced fund, they had the idea that if equities go down, at least interest rates would go down and you have some buffer from the bond side. That was the idea behind generation one risk parity funds.’

‘But now with the bonds, even in the eurozone, deeply in negative territory, there is a big, big danger that the next crash will be a simultaneous bond and equity crash,’ Kieselstein said.

While Kieselstein said he was not anticipating an imminent shock, he said the market events following the Bank of Japan’s expansion of monetary stimulus efforts was cause for concern. This, he said, should have led some investors to assess allocations.

‘We saw some early indication in the Japan action a couple of weeks ago, and, while I am not saying we will see a major crash in bond markets in the next couple of weeks, we won’t see a big relief from bonds in the next equity crash.’

In the UniInstitutional European MinRisk Equities, which he runs on behalf of Quoniam’s parent company Union Investment, Kieselstein currently has 28.6% of the fund invested in Great Britain, while 14.6% of the sector exposure is in financials.

On a three-year total return basis, the UniInstitutional European MinRisk Equities fund returned 39.7% in euro terms against a 24.2% rise by its Citywire-assigned benchmark, the FTSE World Europe TR EUR, over the same period.

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