VIDEOS | MAY 2018
Is your bond portfolio a scope creeper?
Some bond mandates engage in “scope creep”as they reach for yield and take on more risk. Portfolio manager Mark Brett and his colleagues talk about investing in bonds that behave like bonds.
Vik Rao: What we see too often right now are investors with“mandate creep”or “style creep,”and what we mean by that is investors reaching out the curve, taking on more risk and looking to improve returns, but failing to heed low correlation with equities, capital preservation and those core things that we think bonds should provide.
Mark Brett: I like the idea of anything goes and prudently managed. It is exactly that. Anything goes that‘s a bond. That‘s really important, because in a world with these lousy yields, a lot of bond investors have looked for things that say bond on the label but aren‘t really a bond. And that‘s one way to keep yourselves sort of on the straight and narrow, is to only buy bonds that really are bonds.
Thomas Høgh: What we do in this portfolio is we invest globally. We can invest in all global bond markets and the attraction to Canadian investors is that the portfolio is denominated in other currencies than the Canadian dollar. That means that if we have a weak stock market, this is a very attractive product for Canadian investors because the value in Canadian dollars may tend to go up with weak stock markets. The reason for that is that the stock markets tend to be correlated with commodity prices, and since Canada exports more commodities than it imports, the currency tends to be sensitive to commodity price swings, so you get that correlation between commodities and stocks, and therefore you get a correlation to the Canadian dollar and that makes the World Bond Fund Canada very attractive to Canadian investors.
This portfolio is essentially competing in a category of global bond funds or global bond portfolios. So, you could have funds with very large exposures to either high yield bonds, or emerging markets bonds, or both, or you have funds that apply a lot of derivatives in their portfolios, which is also a layer of risk. It may not be, but it depends on how it‘s used. So, the category tends to have very high risk tolerance since there‘s no limit to qualify.
Mark A. Brett is a fixed income portfolio manager at Capital Group. He has 41 years of investment experience and has been with Capital Group for 26 years. Prior to joining Capital, Mark was an economist and strategist with Barclays de Zoete Wedd (formerly de Zoete and Bevan) in London. In addition, he was a director of BZW Capital Markets Ltd. and a member of the London Stock Exchange. Currently, he is a member of the CFA Institute U.K. and is a fellow of the Chartered Institute for Securities and Investment. Mark is based in London.
Thomas H. Høgh is a fixed income portfolio manager at Capital Group. He has 33 years of investment experience and has been with Capital Group for 29 years. Earlier in his career, as a fixed income investment analyst at Capital, Thomas covered Yankee bonds, as well as various non-U.S. bond markets. Prior to joining Capital, Thomas held a number of positions at Privatbanken (now Nordea). He holds an MBA in finance, international business and management from Columbia Business School. He also holds a master’s degree in international economics and a bachelor’s degree in economics, both from the University of Copenhagen, Denmark. Thomas is based in London.
Vikram Rao is head of fixed income trading at Capital Group. He has 25 years of industry experience and has been with Capital Group for one year. Prior to joining Capital, Vik was the managing director and global co-head for fixed income sales and trading at Scotiabank. Before that, he was the managing director and head of fixed income and foreign exchange trading for Canada at Merrill Lynch Canada. He holds an MSc in economics and finance from the London School of Economics and Political Science and a bachelor's degree in economics from Queen's University, Ontario. Vik is based in Los Angeles.