Thursday 31st March 2022
Is the wind turning against bonds?
“Bonds won’t exist in 10 years,” were the words of Vimal Gor, one of the most well-known and respected fixed income managers in the country. He was announcing his departure from Pendal Group, where he had managed as much as $22 billion in fixed income strategies over a multi-decade career.
In recent years, Gor has become more known for his unique viewpoints and market commentary on everything ranging from Modern Monetary Theory (MMT) to bond yields and eventually cryptocurrency and digital assets. He had actually only recently taken charge of the “alternative duration” team at Pendal, which sought to find unique sources of diversification for portfolios.
Gor announced that he would be leaving to join Trovio, a leading global digital asset manager and investor, with a particular focus on crypto. As a long-time fan of Gor, I couldn’t help but think he has impeccable timing to make the switch.
Gor, along with the likes of Bill Gross (of PIMCO fame), has invested in what can only be described as the best conditions for fixed-income investing in history. That is, since the 1980s, interest and bond rates have moved in only one direction: lower. Give or take a few ill-fated rate rise attempts here and there.
Falling bond rates have effectively underwritten the entire fixed-income sector for 30 years, to the point where, in many cases, this part of the portfolio has delivered similar returns to sharemarkets, but at significantly lower risk and volatility. Many are saying this tailwind has come to an end, with proof seemingly on show everywhere at the moment, as many long-term bond strategies have delivered negative 12-month returns for the first time in decades.
Investors and advisers are likely to get a rude shock, particularly those invested in long-duration government bonds, with both equity and bond allocations likely in negative territory this quarter. Is this the driver of what may be the beginning of an exodus from fixed income for many managers? Or is the grass simply greener in crypto land?
It is clear that fixed-income investors will need to work harder than ever to deliver the returns and diversification benefits to which investors have become accustomed (in fact, demand) but should we be throwing the sector out altogether? Amid talk about inflation and wage growth, you can’t help but ask the question of whether wages are increasing due to inflationary concerns, or simply due to a shortage of labour and a more opportunistic workforce than in previous decades?
Only time will tell whether inflation is as sticky, or transitory, or back with a vengeance, and whether the consensus views are right this time.
Drew is editor of The Inside Network's publications and a principal adviser at Wattle Partners.
