Aiming for perfect harmony
The fixed-income world faces a confusing cacophony of challenges. Striking the right keys at the right time is crucial to avoid discord. This calls for handing over the baton to the expert.
Generating alpha is all about hitting the right keys
The fixed income market is currently facing a hubbub of issues. Historically low yields, inflation worries, ultra-tight credit spreads, fears of stimulus unwinding, liquidity premium, concerns of a haphazard recovery and the emergence of new variants of coronavirus are just some of them.
The attempts by central banks to contain the effects of the upheaval caused by the coronavirus pandemic since early 2020 have depressed yields further. Indeed, the market value of negative yielding debt, both sovereign and corporate, almost equals the size of China’s GDP*. In the credit market, spreads have tightened significantly, resulting in elevated valuations.
Everyone is trying to second guess the trajectory of inflation and how soon policy makers will begin to tighten interest rates. It’s well known that policy makers have tried to rekindle inflation since the financial crisis more than a decade ago, with little success. In that world of falling yields and low volatility, economic outcomes were poor, as central bank liquidity flowed directly into financial assets.
But now governments have joined hands with central banks in efforts to boost growth and inflation, giving some heft to the initiative. The rapid vaccination rate achieved in major economic regions of the world has instilled some optimism about recovery. At the same time, supply bottlenecks and labour shortages are creating concerns on the inflation front.
It’s a confusing picture. Even US Federal Reserve officials have been giving off mixed signals. The key question is whether the uptick is transitory, or sticky. Any indication of imminent tightening by central banks or withdrawal of stimulus by governments could bring back memories of the famed `taper tantrum’ of 2013. Indeed, some would argue that the post-pandemic scenario is a perfect recipe for heightened volatility. Liquidity, or the ability to freely trade assets, may become a casualty.
To exploit this complex environment and preserve harmony, management of assets through the transition needs to be just right. That calls for specialised skill, deep experience, and developed expertise. A proven track record of generating alpha amid low yields and increased volatility is crucial. Whether you are seeking to generate income in the face of low yields, are concerned about liquidity in parts of the bond market, are nervous about the potential for a spike in inflation, or simply want to outsource your key fixed income asset allocation decisions, at Jupiter, we believe we have what it takes to address these key concerns. We call this human advantage ‘the value of active minds.’
*The total market value of negative-yielding debt worldwide was US$14.6 trillion as at 17 September 2021, according to Bloomberg. The size of China’s GDP at the end of 2020 was $14.7 trillion, according to World Bank data.
Bond harmony is finding the perfect composition
How do you position for reflation? What happens if an expected economic recovery is delayed? How do you balance risk and reward? How do you determine how much of an expected economic change is already priced in? Will interest rates remain lower for longer or will the central banks give a jolt? What is a realistic outlook for the various bond sub-asset classes? These are all challenging questions for fixed income investors.
Envisioning the long-term market trend is as important as finding returns in the short term. A right mix of assets is essential. Instruments considered less risky, such as sovereign bonds and investment grade corporate debt, may inevitably offer lower yields. On the other hand, higher yielding bonds may carry a greater risk of illiquidity and default. Hedging such risks through derivatives may also entail costs, while following the herd mentality could prove costly if everyone runs for the exit at the same time.
To navigate this complex world, an in-depth understanding of macroeconomic factors such as ageing demographics is as important as studying flows, reading central bank liquidity data and keeping an eye on the vagaries of the currency markets. Understanding what the sheer level of global indebtedness means for inflation and growth is equally important. In this environment, we believe that flexibility and nimbleness are likely to be key to achieving desirable outcomes in fixed income portfolios.
Jupiter offers several potential ‘one-stop’ solutions for investors seeking expertise to allocate their assets dynamically between the various fixed income sub-asset classes as market conditions and the economic environment change over time. Both the Jupiter Dynamic Bond Fund and the Jupiter Strategic Absolute Return Bond Fund (SARB) take an active and flexible approach to investments.
Both the strategies also use similar techniques to study macroeconomic trends to analyse the potential outcome for the global economy. However, the two strategies express that analysis in very different ways. The Dynamic Bond strategy expresses many of those themes by choosing the right sectors of the economy to be exposed to, while also setting the best duration overlay to reflect that analysis. The fund uses only limited foreign exchange exposure. SARB uses limited credit exposure and looks to express its macro views mainly through interest rate, FX and sovereign exposure.
Credit exposure limited: carry not a necessity to generate returns
Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed.
Source: Bloomberg, as at 30/06/2021. Index data from Kepler Absolute Hedge database. Jupiter Strategic Absolute Return Bond
Fund (I class USD Acc).
Find out more
Staying in tune with inflation: managing spikes, fading returns
The pace of price increases in the economy has a big impact on fixed income markets as it dictates the underlying value of the assets as well as real (above inflationary) returns generated for investors. Staying in tune with the direction of inflation is therefore crucial. Central banks around the world have been engaged in a sustained effort to spur inflation since the global financial crisis more than a decade ago.
Major central banks such as the US Federal Reserve, the European Central Bank and the Bank of England have stepped up their game to boost economic growth as the Covid-19 pandemic continues to disrupt normal life. Governments have also elevated spending and are unlikely to withdraw their support anytime soon as the livelihoods of the most vulnerable are the most exposed to the coronavirus.
While the post-financial crisis era was marked by low growth and low inflation, the additional backing from governments this time around has evoked some optimism about growth. But talk of reflation has caused nervousness among some fixed income investors. Is inflation transitory or persistent? That’s the key question many want answered. While a reflationary environment might well signal brighter times ahead for the global economy, it could prove rather challenging for many traditional fixed income investment strategies.
We believe that staying nimble and flexible will be the key to generating strong risk-adjusted returns, growing capital and mitigating risk through the interest-rate, credit and economic cycles. Jupiter’s Dynamic Bond strategy takes a high-conviction, go-anywhere approach, enabling it to adapt the portfolio as markets and the environment evolve. Meanwhile, our Strategic Absolute Return Bond strategy takes a highly flexible approach to investing across the fixed income market spectrum, constantly reshaping itself as the environment changes, with the ability to express outright negative views on duration.
Jupiter Dynamic Bond: Rotation and diversification
The fund manager has the power to use derivatives for efficient portfolio management only, not for investment purposes. Source: Jupiter. as at 31.03.21. DM includes all Western European countries. *Includes interest rate futures. Asset allocation includes derivatives’ exposure.
Find out more
Bond liquidity: let the music flow
Investors in today’s market face plenty of challenges, but a key concern for many is that liquidity in certain parts of the bond market can suddenly become scarce; it has happened before, and some investors believe it could easily happen again. The challenge for many is that predicting the timing of market stress is very difficult. Black swan events could also pose the risk of shock to the financial system. The global financial crisis of 2008 taught some big lessons to stakeholders including banks, other financial institutions, governments and central banks, leading to a significant tightening of regulations over the period that followed.
Still, the spread of Covid-19 caused some anxiety among market participants in early 2020. Central banks once again stepped into the ring, causing a sharp decline in bond yields, shrinking credit spreads and helping to smooth volatility. Governments also played their part to stimulate their economies. But speculation about when policy makers may withdraw support may induce swings in the markets.
Studying the macroeconomic trends closely can play a significant role in helping to maintain portfolio liquidity, even in times of market stress. Bottom-up analysis is also key, as the markets themselves can impact economic fundamentals and be key drivers of the broader asset classes. It’s also important to understand that a portfolio comprising low quality assets could face the brunt of any unexpected paralysis in markets. For instance, private debt markets can offer seemingly attractive yields, yet the market is often opaque and relatively illiquid. An investment philosophy grounded in pragmatism, and a highly active approach to risk management, combined with deep experience, could make a meaningful contribution to helping ensure your portfolio is liquid enough to face a wide range of eventualities.
Staying nimble and alert is the key to ensuring adequate portfolio liquidity. Absolute return funds tend to have high flexibility and make the most use of diversification, avoiding pure directional market plays to seek low correlation to markets. Jupiter’s Strategic Absolute Return Bond Fund continuously reinvents its portfolio to fit the macro environment. The fund predominantly holds sovereign bonds and avoids low-quality assets; liquidity is the key. If you believe that a traditional, long-only approach to fixed income investing risks becoming ineffective in today’s environment, the Jupiter Strategic Absolute Return Bond Fund offers a truly differentiated approach to achieving fixed income exposure, through its continuous reassessment of the economic and market environment and ability to express outright negative views on the direction of interest rates.
Strategic Absolute Return Bond: A dynamic and flexible approach
In today’s market, a long-only approach to fixed income investing is ineffective; there is room for a different approach to fixed income exposure. That’s why the team continually tweaks the portfolio to reflect the underlying macro environment.
For illustrative purposes only.
Find out more
Yield: aiming for the high notes?
It is an astonishing fact that the market value of global negative yielding debt almost equals the size of China’s GDP. This is a direct result of the high demand for fixed-income assets from central banks that have been buying bonds to boost inflation and underpin economic growth. A lion’s share of the purchases involved government bonds, which are widely considered to be safer. They also buy corporate bonds, mostly investment grade.
It naturally follows that many of those aiming for higher yields have essentially been forced to consider investing in lower-rated assets. This could be in the form of high-yield corporate bonds or emerging market debt. Yet, it is a widely accepted reality that compromising on credit quality in pursuit of higher yields is not without potential drawbacks.
Macroeconomic factors such as the trajectory of growth may impinge on a company’s ability to repay its debt. The spread of coronavirus had forced policy makers to impose strict lockdowns to check the spread of the contagion, adversely affecting many businesses. And the emergence of new variants of coronavirus once again threatens to slow the growth engine, despite the progress made on the vaccination front. The potential threat of another `taper tantrum’, or adverse market reaction to a reduction in asset purchases by the Fed, also looms; that in turn could raise questions about whether tighter Fed policy could be a headwind for emerging market assets.
An actively managed “coco” strategy may enable investors to harvest higher yields. The banking sector proved its resilience during the market rout in March 2020, in part reflecting huge improvements in its credit quality since the global financial crisis, with markedly higher capital reserves than was the case in 2008.
Alternatively, emerging market debt (EMD) also offers attractive yields relative to many other areas of the global fixed income market. Jupiter’s EMD platform offers a range of three strategies, spanning the EMD investable universe: short-duration, corporate and hard-currency sovereign. The strategies aim for lower volatility than many of their peers, with a view to maximising risk-adjusted returns and maintaining liquidity. Higher returns can be achieved by investing in high yield bonds too, which have less volatility than equities.
Treasuries no longer deliver treasure…
Source: Bloomberg as at 14/07/2021.
Find out more
Jupiter Dynamic Bond
The fund can invest a significant portion of the portfolio in high yield bonds and bonds which are not rated by a credit rating agency. While such bonds may offer a higher income, the interest paid on them and their capital value is at greater risk of not being repaid, particularly during periods of
changing market conditions. The value of quarterly income payments will fluctuate. In difficult market conditions, reduced liquidity in bond markets may make it harder for the manager to sell assets at the quoted price. This could have a negative impact on the value of your investment. In extreme market conditions, certain assets may become hard to sell in a timely manner or at a fair price. This could affect the Fund’s ability to meet investors’ redemption requests upon demand. Some share classes charge all of their expenses to capital, which can reduce the potential for capital growth. Please see the Prospectus for information. The KIID and Prospectus are available from Jupiter on request. This fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state.
Jupiter Strategic Absolute Return Bond Fund
- Investment risk – while the Fund aims to deliver above zero performance irrespective of market conditions, there can be no guarantee this aim will be achieved.
- Furthermore, the actual volatility of the Fund may be above or below the expected range, and may also exceed its maximum expected volatility. A capital loss of some or all of the amount invested may occur.
- Emerging markets risk – less developed countries may face more political, economic or structural challenges than developed countries.
- Credit risk – the issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due. Bonds which are rated below investment grade are considered to have a higher risk exposure with respect to meeting their payment obligations.
- CoCos and other investments with loss absorbing features – the Fund may hold investments with loss-absorbing features, including up to 20% in contingent convertible bonds (CoCos). These investments may be subject to regulatory intervention and/or specific trigger events relating to regulatory capital levels falling to a pre-specified point. This is a different risk to traditional bonds and may result in their conversion to company shares, or a partial or total loss of value.
- Bond Connect Risk – The rules of the Bond Connect scheme may not always permit the Fund to sell its assets, and may cause the Fund to suffer losses on an investment.
- Interest rate risk – investments in bonds are affected by interest rates and inflation trends which may affect the value of the Fund.
- Liquidity risk – some investments may become hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.
- Derivative risk – the Fund uses derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.
- Currency risk – the Fund can be exposed to different currencies. The value of your shares may rise and fall as a result of exchange rate movements.
For a more detailed explanation of risks, please refer to the ‘Risk Factors’ section of the prospectus.
Meet the team
Latest fixed income insights
A strategy for all seasons
Keep clipping the coupon, but be selective
Notes from the Investment Floor: UK reopens, but are people spending?
The case for 'absolute return' as growth revives amid pandemic
Jupiter Global Fund SICAV
This content is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. [Suitability retail]. Initial charges are likely to have a greater proportionate effect on returns if investments are liquidated in the shorter term.
Every effort is made to ensure the accuracy of the information provided but no assurance or warranties are given. It is not an invitation to subscribe for shares in the Jupiter Global Fund (the Company), or any other fund managed by Jupiter Asset Management Limited. The Company is a UCITS fund incorporated as a Société Anonyme in Luxembourg and organised as a Société d’investissement à Capital Variable (SICAV).
This information is only directed at persons residing in jurisdictions where the Company and its shares are authorised for distribution or where no such authorisation is required. The sub fund(s) may be subject to various other risk factors, please refer to the Prospectus for further information. 8 Prospective purchasers of shares of the sub fund(s) of the Company should inform themselves as to the legal requirements, exchange control regulations and applicable taxes in the countries of their respective citizenship, residence or domicile. Subscriptions can only be made on the basis of the current prospectus and the Key Investor Information Document (KIID), accompanied by the most recent audited annual report and semi-annual report. These documents are available for download from www.jupiteram.com. The KIID and, where required, the Prospectus, along with other advertising materials which have been approved for public distribution in accordance with the local regulations are available in English, Dutch, French, Finnish, German, Italian, Portuguese, Spanish and Swedish. Before subscribing, please read the Prospectus. Hard copies may be obtained free of charge upon request from any of:
The Company Custodian and Administrator: JP Morgan Bank Luxembourg S.A, 6 Route de Trèves, Senningerberg, L-2633, Luxembourg; and from certain of the Company’s distributors; Austria: Jupiter Asset Management International S.A., Austrian branch, Goldenes Quartier, Tuchlauben 7a, 1010 Vienna, Austria; Belgium: BNP Paribas Securities Services, Boulevard Louis Schmidt 2, 1040 Brussels, Belgium; France: CACEIS Bank France, 1/3 Place Valhubert, 75013 Paris, France; Germany: Jupiter Asset Management International S.A., Frankfurt branch, whose registered office is at: Roßmarkt 10, 60311 Frankfurt, Germany; Italy: Allfunds Bank, S.A.U., Milan Branch, Via Bocchetto 6, 20123 Milano, Italy. Société Générale Securities Services, Via Benigno Crespi 19, 20159 Milano, Italy. The Fund has been registered with the Commissione Nazionale per le Società e la Borsa (CONSOB) for the offer in Italy to retail investors; Luxembourg: the Company’s registered office: 6 Route de Trèves, Senningerberg, L-2633, Luxembourg; Spain: Allfunds Spain: Bank, C/ La Estafeta 6, Edificio 3, 28109 Alcobendas, Madrid, Spain. For the purposes of distribution in Spain, the Company is registered with the Spanish Securities Markets Commission – Comisión Nacional del Mercado de Valores (“CNMV”) under registration number 1253, where complete information, including a copy of the marketing memorandum, is available from the Company authorised distributors. Subscriptions should be made through a locally authorised distributor. The net asset value is available on www.jupiteram.com. Sweden: Jupiter Asset Management International S.A., Nordic branch, 4th Floor, Strandvagen 7A, 114 56 Stockholm, Sweden; Switzerland: Copies of the Memorandum and Articles of Association, the Prospectus, KIIDs and the annual and semi-annual reports of the Company may be obtained free of charge from the Company’s representative and paying agent in Switzerland, BNP Paribas Securities Services, Paris, Succursale de Zurich, whose registered office is at Selnaustrasse 16, 8002 Zurich, Switzerland; United Kingdom: Jupiter Asset Management Limited (the Investment Manager), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom, authorised and regulated by the Financial Conduct Authority. [Index data] Issued by The Jupiter Global Fund and/or Jupiter Asset Management International S.A. (JAMI, the Management Company), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of the Company or JAMI.
MARKETING MATERIAL ONLY. DOES NOT CONSTITUTE INVESTMENT ADVICE OR INVESTMENT RESEARCH.
Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rates may cause the value of overseas investments to rise or fall.
IN AUSTRIA, FRANCE, ITALY, LUXEMBOURG, PORTUGAL AND SWEDEN: This communication is issued by Jupiter Asset Management (Europe) Limited, The Wilde-Suite G01, The Wilde, 53 Merrion Square South, Dublin 2, D02 PR63, Ireland.Jupiter Asset Management (Europe) Limited is registered in Ireland (company number: 536049) and is authorised and regulated by the Central Bank of Ireland (number: C181816).
IN THE UNITED KINGDOM AND ALL OTHER EEA COUNTRIES: This communication is issued by Jupiter Investment Management Limited, The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom. Jupiter Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FRN: 171847).
This communication provides information relating to [INSERT SUBFUND NAME] (the “Fund”), which is a sub-fund of Jupiter Asset Management Series plc. Jupiter Asset Management Series plc is an 14 investment company with variable capital established as an umbrella fund with segregated liability between sub-funds which is authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended. Registered in Ireland under registration number 271517. Registered office: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland.
Jupiter Asset Management (Europe) Limited and Jupiter Investment Management Limited are collectively known as Jupiter.
Jupiter uses all reasonable skill and care in compiling the information in this communication which is accurate only on the date of this communication. You should not rely upon the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. An investor should read the Key Investor Information Document(s) (“KIID”) before investing in any sub-fund of Jupiter Asset Management Series plc. The KIID and the prospectus can be obtained from www.jupiteram.com in English and other required languages. Certain paying and/or information agents have been appointed in connection with public distribution of the shares of Jupiter Asset Management Series plc in certain jurisdictions. Shares are sold by prospectus only. The prospectus, KIID and/or other relevant offering documentation is available free of charge at: Austria: Erste Bank der oesterreichischen Sparkassen AG, Belvedere 1, 1010 Wien, Austria. Belgium: CACEIS Belgium SA, B-1000 Brussels, Avenue du Port 86 C b320, Brussels. Germany: GerFIS – German Fund Information Service UG (Haftungsbeschränkt), Zum Eichhagen 4, 21382 Brietlingen, Germany. France: BNP Paribas Securities Services, Les Grands Moulins de Pantin, 9 rue du Debarcadère 93500 Pantin, France. Hong Kong: Merian Global Investors (Asia Pacific) Limited, Suite 1706, Alexandra House, 18, Chater Road, Central, Hong Kong. Italy: Allfunds Bank S.A.U., Milan Branch, Via Bocchetto, 6, 20123 Milano, Italia; Societe Generale Securities Services S.p.A, Via Benigno Crespi 19A – MAC2, Milan Luxembourg: BNP Paribas Securities Services, Luxembourg Branch, 33 rue de Gasperich, L-5826, Grand Duchy of Luxembourg. Sweden: Skandinaviska Enskilda Banken AB (“SEB”), Kungsträdgårdsgatan 8, SE-106 40, Stockholm, Sweden Switzerland: First Independent Fund Services Ltd., Klausstrasse 33, CH-8008 Zurich is the Swiss representative and BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH8002 Zurich is the Swiss paying agent. Taiwan: Capital Gateway Securities Investment Consulting Enterprise, 9F/9F-1, No. 171, Songde Road, Xinyi District, Taipei City, Taiwan, R.O.C. United Kingdom: Jupiter Investment Management Limited, The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom. The Fund is recognised by the FCA. Other: Jupiter Asset Management Series plc, c/o Citibank Europe plc, 1 North Wall Quay, Dublin 1, Ireland. In Denmark, this material is only intended for the exclusive use of Danish eligible counterparties or professional investors. Danish retail investors may not invest in the sub-funds mentioned in the material. In Spain, Jupiter Asset Managemen Series plc is registered with the Comisión Nacional del Mercado de Valores (“CNMV”) under number 301. Jupiter Investment Management Limited is registered under number 2479. The prospectus, KIID and the latest economic reports can be obtained at no cost from registered distributors as per the list available on the CNMV web page. 15 In the Republic of Finland, this communication is not intended to constitute a public offer or an advertisement of securities. In Italy, this material is for the exclusive use of “professional clients or professional investors” (as defined in Legislative Decree no 58/1998 by reference to Annex 3 of CONSOB Regulation no. 20307 of 2018) and its dissemination to retail investors/clients is prohibited. In Luxembourg, this information does not constitute, under any circumstances, an offer or an invitation to purchase or sell shares in Luxembourg and does not and is not intended to constitute an offer of shares in the Grand Duchy of Luxembourg. It does not constitute legal, accounting, or tax advice.