Active management still vital for fixed income says BlueBay AM

Active management still vital for fixed income says BlueBay AM

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BlueBay Asset Management was established in 2001 as a specialist discretionary manager of global fixed income, with a firm focus on the twin themes of the creation of a single European credit market and the maturation of emerging market credit.

It has remained committed to these sectors and has since built up a workforce of 400 and an AuM to just under $60bn. “Active management continues to add value in this relatively illiquid and bilateral asset class. Both are ongoing themes that continue to feed the growth of BlueBay,” says CEO Alex Khein.

Indeed, the single European fixed income market has grown in a “fast-forward version” of what happened in the US in the prior 30 years. Likewise, emerging market credit, following the crises of the 90s and subsequent reforms “has emerged as a truly global, investable asset class”.

From its origins as a hedge fund, BlueBay’s product suite evolved to include an ever-increasing share of more scalable institutional long-only products. Its traditional long-only business now makes up nearly 75% of AuM.

A trend of the last few years has been a flow out of pure hedge funds and traditional long-only funds into mainstream alternatives, or outcome-oriented funds. Such funds now make up around 25% of BlueBay’s AuM. “There are roughly $100trn of assets in the world of which around $7trn are alternatives,” he says. “The likely trend is for the growth of outcome-oriented products, but in which format remains to be seen.”

While there has been innovation within fixed income in terms of passive investment and ETFs, Khein does not think that such strategies will ever have the impact that they have had in equities.

“Heterogeneity, illiquidity and multidimensionality make it much harder to apply simple and prescriptive rules to fixed income. It’s bilateral and has capital structure, spread, interest rate and currency inputs in the investment decision making process.”

While passive investments have gained some traction this may be more a result of the prevailing monetary policy environment than an indication of a long-term trend.

Central bank stimulus over the last seven years has meant market technicals have been pointing in only one direction. “Every successive input from central banks around the world has led to consumers spending more, and companies investing more and leveraging up,” says Khein. “That has led to the deterioration of credit fundamentals.”

While QE has had a muted simulative effect on economies it has also meant, from a fund management point of view, that it has become very difficult to hold a fundamental view and beat the market.

“So we have had a prolonged period where beta wins,” says Khein. “But, we are getting very late cycle. If I were an investor I would ask ‘how can I evaluate asset managers in a market environment where the next seven years will be very different from the last seven years?”

A connected concern is that central banks are unlikely to be able to jumpstart the world economy on the back of existing policies. “There is a limit to what central banks can do – and mathematically we must be close to the end of that.”

With central bank balance sheets in some cases equivalent to 80% of GDP: “One has to wonder how much longer they can continue to leverage their balance sheets before considering other courses of action, especially as inflation is subdued.”

There is a natural sequence for banks to move through: first QE, then negative rates – where we are now – before reaching the need for so-called helicopter money.

“If you cannot stimulate growth or inflation through low or negative interest rates, then you could try to do so through the controlled printing of money,” he adds. “But that would of course have a negative effect on fixed income.”

Even if such a course of action was handled with caution it would raise questions about the independence of central banks and its effects would be complex and unpredictable. “I can intellectually understand it, but I find it personally difficult.”


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