The lack of viable investments means absolute return bond managers should feel no guilt about tactically keeping cash back until better opportunities emerge, GAM’s Timothy Haywood has said.
The sector veteran, who runs the €2.66 billion GAM Absolute Return fund, told Citywire Selector his current 12.9% allocation to cash and cash equivalents is high, but for good reasons given market dynamics.
‘Cash arises from pauses between investments. But just because we have cash doesn’t mean we don’t have risk. We use derivatives which are cash collateralised. It looks like we have a lot of cash but we also have swaps and futures,’ he said.
‘So, yes we have cash because we need to have cash. Whilst it would be lovely if we got a better return on cash than we do with high quality banks because they don’t pay very much in the way of interest.’
Haywood said he wanted to avoid ‘lazily’ putting money to work in areas such as corporate bonds, where there are few compelling opportunities, while traditional sovereign debt offers increasingly limited appeal.
‘Generally we think developed market bonds are pretty expensive due to the level of absolute yields, which are pretty low and, in numerous cases, negative,’ he added.
‘The quantum of negative bonds has shrunk from $12 trillion at the peak to $7 trillion but that is still $7 trillion and if you have landed from Mars and wanted to make a long-term investment, it is hard to see that you that would start by buying those bonds.’
Haywood highlighted how the proliferation of central banks and ETFs indiscriminately buying debt had changed the shape of the market and made it tougher for active investors – especially those with absolute return mandates.
‘Buying patterns like this do, however, create an opportunity for momentum to kick in as a more important factor than you would expect for an asset class that doesn’t lend itself to momentum.
‘You are always going to get a set price back on a bond, never double that redemption price and only if there is a default will you get maybe less than half. Momentum therefore has started to matter and I think it has given us an opportunity. Anyone who can work out how clunky buyers are working create an opportunity to benefit.’
The GAM Multibond – Absolute Return fund returned 3.3% in euro terms over the 12 months to the end of June 2017. The average fund in the Alt Ucits – Bond Strategies sector returned 2.6% over the same timeframe.