The grand reopening of the world economy, scheduled for this summer as vaccination campaigns ramped up over H1, sadly turned out to be let-down. The spread of the Delta variant led many countries to slow or pause their reopening plans, and as a result the handover of economic growth from goods to services didn’t materialise. Furthermore, ongoing supply constraints impacting various industries have put the brakes on growth. So what next after this summer of discontent?
Is the sun rising on the ‘Fed put’ party…
Since their June meeting, the Federal Reserve (Fed) have continually reminded markets that they are keen to normalise policy, openly discussing hawkish plans for both tapering and rate hikes. Market behaviour has indicated some scepticism about that, which is understandable because of the persistent historic validity of the ‘Fed put’, which is the idea that the Fed will do everything within its power to keep the party going for risk assets. As each Fed meeting reiterating and reinforcing tapering and their normalisation plan comes and goes, however, markets may be forced to accept that the sun is coming up and its long party is over. But the Fed has pivoted dramatically before, and it isn’t too late for them to do so again.
The rise in long dated forward inflation since the pandemic lows in March 2020 has been one of the more surprising trends over the last couple of months. This rally has extended to such an extent to take even the 15y15y Euro inflation pricing to its highest level since early 2019 and above 2%. Therefore the market is pricing longer term inflation in Europe at historically more “normal” levels even allowing for when the current supply-side constraints ease.
Our view is that worries around a growth slowdown and the rise in Delta cases have made the Fed’s hawkish surprise in June look unnecessary in retrospect. The views of many members of the Federal Open Markets Committee are probably skewed by their early life experiences when inflation was high, and the combination of the expected growth profile and elevated pricing levels across the economy plainly spooked them in June.
Whether or not the Fed persists with early rate hikes remains to be seen, and if they do proceed we’d expect them to do so slowly. It is notable how other central banks are now shifting away from extremely easy policy too – e.g., the Bank of England is now expected to raise rates in early 2022 , while the European Central Bank will slow its bond buying programme . The timing of this makes more sense to us, as we do see growth sentiment bottoming after the summer slowdown and improving into 2022. Transitory inflation likely will remain sticky and, as it slowly falls, it will meet cyclical inflation on the rise presenting trickier times for markets and central banks.
For our part, we were bearish about fixed income at the start of the year, and used the flexibility of the Jupiter Strategic Absolute Return Bond fund to position the portfolio accordingly, moving to an outright short duration position across all major markets and reducing the US dollar short position in time for the February sell-off.
Nothing has happened since then to change our bearish view on fixed income, and indeed the subsequent hawkish shift from central banks strengthens our conviction. We believe that global bond yields are still too low and will start to sell off from the long end, accompanied by a somewhat weaker US dollar that will augment the case for emerging markets. As ever, the macro backdrop is highly dynamic and our investment process is set up to be proactive in positioning for where we see the environment moving.
When the facts change, what do you do?
Dynamic and speedy asset allocation, and the ability to take short positions, are cornerstones of how we manage the Jupiter Strategic Absolute Return Bond fund. The starting point is our macroeconomic view, both on a strategic and tactical level, which the team reassess as a continual process. As our view of the macroeconomic backdrop changes, so the portfolio must reorientate around that. To paraphrase Paul Samuelson’s famous quote: when the facts change, we change our mind.
The way we think about risk in this context comes down to the construction of the fund. We are volatility targeters, aiming for an average volatility of around 5% for the fund. When we come to construct the portfolio we use risk budgeting to allocated risk to each individual position and from there the appropriate position size.
By controlling risk in this way, and using all the flexibility at our disposal to shift between any fixed income asset as well as currencies, either long or short, across both developed and emerging markets, we seek to smooth the return profile over the cycle. Ideally, the result will be outperformance when the markets have a bad time, although when there is a bull market we’re unlikely to fully capture it, but over the cycle our goal is to generate superior returns. We’re proud to say we have delivered that for the fund’s investors so far.
Fund vs benchmark (Federal Funds Effective Overnight Rate)1
Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed.
1Source: JAM, Bloomberg, 25.05.17 – 31.08.21. NAV to NAV, gross income reinvested, net of fees, in USD.
2The benchmark since 25.05.17 is the Federal Funds Effective Overnight Rate. Performance prior to May 2017 was achieved under circumstances that no longer apply and no index is available to provide a useful comparison of the fund between prior to and after that date. With effect from 01.08.16, Mark Nash became the Fund Manager. This share class has an extended track record based on the F1 USD Acc share class. On 25.05.17, the fund’s benchmark changed from the JP Morgan Global Government Bond Index USD hedged, to cash (USD – Fed Funds Effective Overnight Rate).
In modern fixed income markets you need to do something different
The challenge that fixed income investors, and those who allocate to fixed income assets, face is that real yields are incredibly low. In our view the reality is that they will stay low for a very long time. So where do you try to source returns in such an environment?
One approach is to go down the quality spectrum in search of higher yields – a valid move if one’s due diligence is up to the task of avoiding land mines, but it’s not the approach we take. Our preferred route is to rely on flexibility to help us generate returns. By capitalising on our broad opportunity set, continuously reinventing the portfolio and putting risk management at the forefront of our investment process, we believe the Jupiter Strategic Absolute Return Bond fund is the place to be for those seeking an alternative approach to fixed income.
01 Sep ’16 to
31 Aug ’17
01 Sep ’17 to
31 Aug ’18
01 Sep ’18 to
31 Aug ’19
01 Sep ’19 to
31 Aug ’20
01 Sep ’20 to
31 Aug ’21