Fixed income fund managers consider bolder measures in the face of interest rate risk

“The uncomfortable experience of 2008 had prompted many fixed income fund managers to become more benchmark-agnostic in their investment approach and focus on delivering a smoother return profile for their investors,” said James Mashiter, lead analyst at S&P Fund Services.

“In the context of duration strategy, global bond managers have traditionally tuned their duration by (typically) +/-2 years against the benchmark. However, recognising that this is not sufficient to protect against capital losses in a rising yield environment, more managers are now looking to exploit the wider scope of their mandates,” Mashiter said.

Among the bolder managers is Stewart Cowley at Old Mutual, who has taken particularly aggressive steps to safeguard against – and indeed profit from –what he expects to be a structural rise in government bond yields from hereon in. At 31 January, his Old Mutual Strategic Bond Fund was running a duration exposure of -2.6 years. The absolute return approach of Paul Thursby and Peter Geikie-Cobb at Thames River is also likely to result in a flexible approach to duration in pursuit of a positive return.

“Some managers, of course, are more sanguine on the outlook for government bonds,” Mashiter points out. “The team at PineBridge, for example, expects US Treasury yields to remain range-bound for the foreseeable future. Managers who take this view intend to continue running their duration exposure according to a more traditional benchmark-aware style.”