So far it seems to be working – the BT Wholesale Fixed Interest Fund and the BT Pure Alpha Fixed Income Fund are ranked first in their sectors in the year to end July.
Let’s be clear – we do not want equities to fall, but at certain times they do and our investment process is built to profit from those times. We find that our way of managing money generally polarises people and it might not always work perfectly, being the safest house on the street, but in the midst of the current market environment it has been effective.
For the past year we’ve been very vocal about constructing the portfolios around four central investment themes:
- The global economic growth pulse is now slowing with all areas contributing to the weakness, including the US.
- The emerging market crisis, that we have been expecting for some time, is now firmly in train and it will worsen in the short to medium-term.
- Liquidity is mispriced and volatility is too low and will rise soon
- Risk assets are due for a period of consolidation/weakness.
Overall then, my portfolios have been building exposures to bonds (which the investor base is very short), the USD (which will benefit from a safe haven bid and continued short covering) and volatility (which is still very cheap).
In the shorter term, as I wrote in my newsletter at the start of July, our Core-Scorecard risk indicators have been highlighting an imminent period of heightened volatility and these lined up with our qualitative views. We increased portfolio liquidity and built up our tail exposures as a consequence.
We believed the markets were far too complacent in regards to the Greece situation and bond markets, caught in the bearish short-lived reflation between April and June, offered significant value especially in a world with so many risks on the horizon. Credit markets were and still are far too tight in spread. Equity momentum had been clearly waning and US equity markets looked to be completing a large topping pattern which is often followed by periods of weakness
The recent market movements aided the BTIM Income & Fixed Interest Funds. But in the medium-term I fully believe that the risk-asset drawdown still has further to go in terms of duration and depth. I spoke at the BTIM Roadshow in May of this year on the deteriorating liquidity in markets and how the market depth is just an illusion. This is being played out in front of our eyes with flash crashes happening on virtually a daily basis now. Volatility begets more volatility and so on and we expect more of the same over the coming months.
Your fixed income funds are supposed to help you weather these kind of market environments. If yours isn’t performing how you would have expected it to may be worth changing your provider.
Ps Did I mention that credit securities look massively overvalued here?
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BT Investment Management was awarded the 2015 Australian Fixed Income Fund Manager of the Year by Lonsec/ Money Management.
