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Don’t follow the short duration crowd, says global bonds CIO

Don’t follow the short duration crowd, says global bonds CIO

Portfolio managers and fund houses are increasingly being drawn into short or zero duration strategies, but they could be misusing a useful tool to combat rising rates, MFS’s William Adams has said.

Speaking to Citywire Selector, Adams, who is chief investment officer for global fixed income at the US group, said the world has adapted to a ‘lower for longer’ mentality when it comes to interest rates and this looks set to remain intact through 2018.

However, Adams, who primarily focuses on US high yield debt, said investors were being sucked into short duration strategies as a means of protecting against inevitable rate rises.

'We are still in the low interest rate environment that has dominated much of the past few years and most of the post-financial crisis period. This "lower for longer" environment is something we have adapted to and was very much part of our thinking throughout 2017.

'Having said that, we have seen a co-ordinated, global cyclical uptick in economic activity for the first time in the post-crisis environment. However, structural factors are likely to keep rates lower with more limited expectations for rate increases.

'We believe interest rates should be slightly higher than current market pricing given the global growth environment, but not materially so. We are not proponents of the bond bull bubble bursting and we think investors are better served in keeping some duration in their portfolios.

'This is one of the main diversification tools in your portfolio. You need to manage duration and interest rate exposure, but we do not advocate aggressively positioning in the short-term. We would not recommend being in a short duration or zero duration product in the current environment.'

Duration equation

Focusing on the $725 million MFS Meridian Funds – Global High Yield fund, which he co-runs with Matthew Ryan and David Cole, Adams said he has adopted an average effective duration of 3.9 years, largely through US dollar and dollar bloc duration plays.

'Duration is not a primary driver of high yield returns. We monitor it closely in the MFS Meridian Global High Yield fund, but prefer fundamental credit research and security selection to dominate the return stream.

'Our macro view at a fixed income department level is that we remain comfortable with US dollar duration and dollar bloc duration in those portfolios using duration as an alpha tool, albeit with slightly short targets.

'Our current views on the rate markets and risk markets feels counter to the current consensus, and ties with our efforts to be cautious with fixed income risks right now.'

In an interview with Citywire Selector in October 2016, Adams said investors were ‘fighting the environment’ of financial repression when they should learn to adapt and thrive amid lower rates.

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