Bond Investors Need to Lower Income Expectations

Returns available from fixed income are muted compared to historic yields, says Ian Sims, CIO of Colchester Global - but there are still opportunities out there for bond investors

Emma Wall 22 March, 2016 | 8:00AM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Ian Sims, chief investment officer for Colchester Global.

Hi Ian.

Ian Sims: Hello Emma.

Wall: So where can we find value in the bond market right now?

Sims: Well I think that really depends on your expectation of course. If we are talking of value as one might have traditionally thought of it as 5%, 6%, 7%, 8% coupons and 3%, 4% real yields. That’s obviously near impossible in today's market unless you try to do something, which would probably be too clever for your own good.

In terms of keeping things simple all we can realistically do as investors is to deal with what we've got and what we've got is large return by the central banks, by the economy, things that are outside of our control. So it only makes sense to look at things that are inside of our control. As global investors unfortunately we live in a world now where we can deploy capital which makes more sense for investors all around the world.

We're always making these struggles, these decisions about credit ratings, about yields, about inflation in countries about amount of debt they have, about the risk of default and so on and so forth.

Wall: I think that’s a really interest point, because people have been forced up this yield curve. As you say 7% was attainable on cash not very long ago is now a pie in the sky. So people have been forced to look to high yield bonds, look to emerging market debt in order to get that income. How do you balance that risk and reward?

Sims: We don’t try to do that frankly. I think that’s one of the biggest mistakes investors can ever make to say, well I need 5% each year. So I am going to do something which gives me 5% yield each year. It inevitably drives even to things you really shouldn’t be doing on a long term basis and of course this is how bubbles start; by too many investors trying to achieve the impossible. So I think just be realistic it is what it is. The yields are not awful on a real yield basis when you look particularly outside the G-3.

Wall: Because inflation is so low.

Sims: Inflation is low.

Wall: So where are you finding that, and where is the perfect blend? If that’s achievable.

Sims: I mean we're looking outside the G-3 now, we certainly enjoyed the Eurozone ride when it was happening but it's over in our opinion. We tend to look elsewhere even though yields are particularly high, the Australia, New Zealand market still look as if they have some added value to us.

Within Europe probably Norway is the only place we put money. But outside of that of course it’s the emerging market countries or the better quality emerging ones. I know this has been story for a while. But it's not been our story until recently. I think it was only, we only started to see clear blue water between emerging market bond, local government real yields and the developing world round about the beginning middle of last year. But now it's clearly there.

Wall: Ian thank you very much.

Sims: Thank you pleasure.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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