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What’s Keeping These 4 Fixed Income Managers Up at Night

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As the population ages and so do pension plans pension, there is obviously a sector need for fixed income, according to Karl Dasher, CEO and co-head of fixed income in North America at Schroders.

“Given that we need to be in it, how do we operate within this environment, where the compensation for risk at the highest level, at the aggregate level, has declined significantly?” Dasher asked.

Schroders held a panel discussion that was moderated by Dasher in New York on Tuesday for media to discuss their outlook for the fixed income sector.

According to Dasher, politics and the current political environment underlies everything the fixed income team is doing.

Dasher, who has been in the business for more than 20 years, said he’s never seen a time where investors are having to spend more time thinking about the actions of politicians then they are today.

“If I go back four or five years ago, it was a migration to the actions of central bankers. We were spending a lot of time thinking about them,” Dasher said. “Now we’re spending a lot of time thinking about the actions of politicians.”

Beyond monitoring politics, Dasher asked four of Schroders’ fixed income portfolio managers to discuss the biggest risks keeping them up at night.

Andy Chorlton, head of U.S. multi-sector fixed income

For Chorlton, it’s a lack of risk that’s keeping him awake.

“We’ve got the least aggregate amount of risk in our strategies that we’ve had at any time since the financial crisis,” Chorlton said.

Chorlton is concerned about how long what he considers a “QE-fueled misprice of risk” will continue.

“That’s our biggest concern is that QE, I strongly believe, mispriced risk completely in fixed income particularly,” he added.

Michelle Russell-Dowe, head of securitized credit

Russell-Dowe also called out QE as the basis for her concerns.

“Everyone has been sort of mollified by stimulus, by QE, into feeling things are very calm and steady and they have been for a very long time,” she said. “Anybody who’s bearish on rates has been punished since 2012.”

Because the Federal Reserve telegraphs everything, Russell-Dowe doesn’t expect any “earth-shaking surprises.” In the meantime, Russell-Dowe said, “everyone sits around the room trying to discuss where’s the surprise coming from that I can’t see?”

But, if Russell-Dowe had to pick just one concern that’s keeping her up at night, it’s that “people have unlearned lessons that they should have learned through the financial crisis.”

For example, the lesson that “you need compensation for taking on structural leverage.”

Jim Barrineau, co-head of emerging markets debt relative

While Barrineau follows President Donald Trump on twitter, he says he’s less worried about an errant tweet about Mexico than he is about “unraveling QE when asset prices in every arena are inflated” and a “recognition by central banks that there’s lower perpetual growth everywhere in the world.”

According to Barrineau, the concern with those two things is if “politically we decide that we need additional fiscal stimulus to try to go from 2% growth to 3% growth in the U.S. or 1.5% growth to 2.5% in Europe or zero to 1.5% [growth] in Japan.”

“And we all decide that’s the solution, fixed income is going to have to really radically re-price,” he said.

To Barrineau, that’s more of a political decision than an economic one, though.

“Thank goodness it’s so difficult to get the political chairs aligned in the U.S. to actually make that happen so we dodge that bullet for now, but that’s something that if it becomes more apparent in the future could really [cause an] upset.”

Martha Metcalf, U.S. fixed income portfolio manager

Metcalf thinks more in terms of compensation from risk versus the absolute level.

“We just don’t feel the market’s compensating you for all of these overhangs,” she said. “So I guess my worry is that this could continue. Spreads could even continue to compress a little bit, but it’s costing us less and less to hold that view with yields lower.”

In response to this, Metcalf has positioned her portfolios conservatively.

“We have elevated cash levels, we’ve allocated to investment grade to try to protect ourselves,” she said. “We’ve even taken the top off positions of names we like that have done extraordinarily well because in a pullback then we can be adding back names that we like, things that have outperformed.”

Metcalf said they are wrestling with “should we just get more conservative, and risk really lagging because it could continue.”

— Check out Money Manager Predicts Japan Will Restructure Its Debt on ThinkAdvisor.


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