Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Brandywine beats bond blues as fixed interest gets interesting
Brandywine Global investment director, Richard Rauch, suffered a case of the bond blues in 2020 as the COVID pandemic pushed already historically low interest rates to zero and below.
“With fees higher than yields, I didn’t know whether I should stay in fixed income,” Rauch said.
But after the near-death experience, his loyalty to the asset class is paying off amid the inflation scare and rapid rate hikes of the previous 18 months or so. Suddenly, fixed interest is interesting again. Rauch, who joined Brandywine Global in Sydney from First Sentier Investors last year, said demand for fixed income solutions has surged along with the macro-economic reversal.
And the volatile conditions – delicately poised following the most rapid series of central bank rate hikes ever – should play into the hands of active fixed interest investors, he said. Known primarily in Australia for the Global Opportunistic Fixed Income (GOFI) strategy, the manager is conservatively positioned at the moment, according to Rauch.
“If 10 is the most conservative, we’re probably at eight and three-quarters,” he said.
GOFI is currently long duration, short credit and wary of the US dollar with some over-weights to the Japanese yen and certain Latin American currencies. The June quarter Melville Jessup Weaver (MJW) investment survey puts the GOFI ‘modified duration’ at almost nine years – the highest by far of all global fixed income managers captured by the report.
GOFI has outperformed its benchmark (the FTSE World Government Bond index) before fees over all periods covered in the MJW survey, returning an annualised 3.4 per cent for the 10 years to June 30, 2023. Of course, much will depend on how data-dependent central banks negotiate the next few months with investors still torn on whether the peak is in and how long high rates are likely to endure.
“Investors have to be one half-step ahead,” Rauch said. “We’re paid to take active risks.”
Brandywine Global is more active than most in the asset class in an ‘unconstrained’ approach that has proved attractive to investors in NZ and Australia, who represent a reasonable proportion of the roughly US$20 billion held in GOFI strategies.
The manager, now part of the Franklin Templeton family, has sourced about $7 billion from Australian and NZ clients, most of which is in GOFI. NZ investors have tipped in about $600 million including $230 million in a portfolio investment entity (PIE) vehicle launched in 2018.
However, the fixed income doldrums during the lower-for-longer interest rate era – kicked off by the global financial crisis and pushed into extra time by COVID – have taken a toll on the Brandywine Global assets in NZ that stood at more than $800 million when the PIE opened for business. Rauch said that Brandywine was committed to the NZ market, and that most clients understand that the GOFI performance will vary over time compared to vanilla bond funds.
This article originally appeared on Investment News NZ.
