Schroders will launch its new Global Unconstrained Bond portfolio for Bob Jolly and Gareth Isaac with a significant weighting to emerging market debt, (EMD) currency and derivatives as the team believe traditional benchmark aware bond strategies have had their day.
Speaking ahead of next month's launch, Schroders head of Global Macro Jolly (pictured) said there would be opportunities across emerging markets through both currencies and corporates, and he singled out Sri Lanka and Venezuela as two countries that were currently offering interesting fixed income opportunities. He said the new fund would be an unconstrained best ideas portfolio that would also make strong use of leverage and derivatives.
EMD weighting significant
Jolly said the firm would look to close it at around the £5 billion mark, and Schroder Fixed Income CIO Philippe Lespinard said he hoped the additions to the bond team over the past two to three years were now complete and would help to make the company a top tier player in the fixed income market.
Jolly said: 'People keep telling us they are worried about capital loss because there is no yield and no growth and inflation is coming. They are also worried about income in a wage constrained environment and QE may unleash more inflation.'
'Beta won't make you rich but volatility will offer the opportunities to make alpha. At the start of 2012 most of the risk was in credit but now it is dominated by FX because currency is offering the most alpha opportunities. 'It is all about long term returns for the bond market which is why we have an absolute return focus.'
Jolly said he had made a lot of money from the falling Japanese yen in recent weeks and said he was 'salivating' about the opportunities to make more alpha in the present currency environment as the market flipped between risk on and risk off mode.
Lespinard said many firms were now going through the transition that Schroders had undertaken over the past three years, in a bid to boost their capabilities in unconstrained and Libor plus fixed income vehicles as conventional benchmark aware bond funds look less likely to offer alpha going forward as well as being at risk of losing significant amounts of money.
He said: 'It will be hard work making money from here from gilts to investment grade and we think it is very unlikely to see a positive return from investment grade and coporate bonds.
'Beta won't work for you the way it has for the past 30 years and now you have to add return by active management when the forward yield curve is offering a zero return over cash and most of the skills have moved to the leveraged side, not duration.
He added: 'It is relatively cheap to buy protection at present but that will change. A bear market in bond markets is coming so we need to protect our clients' portfolios from it.'
Over the last three years, Schroders has considerably strengthened its fixed income capabilities with a number of key additions.
Since Lespinard joined the company in 2010, the firm has made a string of key fixed income hires, including Rajeev de Mello as Head of Asian Fixed Income, Bob Jolly as Head of Global Macro, James Barrineau as Head of EMD Relative, and Patrick Vogel as Head of European Credit.