Finding fixed income returns in unusual places

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Fixed income fund managers have been venturing into obscure corners of the financial markets to find assets that will produce returns in what most acknowledge is a difficult market.

GAM Investments has been buying insured notes comprising trade receivables as a way of replacing some of its cash and near-cash allocations.

“One of the few positive effects of today’s low-rate environment is that it forces us to explore corners in the market for debt finance where risk is still straightforward, manageable and rewarded, and where liquidity is improving,” says Tim Haywood, GAM’s head of fixed income.

Haywood says fixed income investors have their work cut out for them. Government bonds remain expensive, yet intermittent rallies will be too lucrative to ignore. Corporate bonds have their best days behind them.

“We may see losses in developed market government bonds during, say, nine out of the coming 12 months, as yields rise,” he says.

“Our aim is to profit from these yield-rising moves, which we have had a track record of achieving in our absolute return strategy. We believe that future returns in fixed income will be found in unconventional assets, or occasionally being short conventional ones.

The fund’s mandate permits fixed or floating exposures across developed and emerging markets, investment grade and high yield credit, asset-backed securities, foreign currencies and convertible bonds.

“The fund is also permitted to use a broad range of investment tools and techniques to gain market exposure, including both long and short exposures. GAM uses derivatives and will commonly elect to gain synthetic exposure in an effort to tailor positions and to enhance trade efficiency.”

Over the past five years the GAM Absolute Return Bond Fund has produced an average return of 3.9 per cent a year. Its benchmark is the AFMA Bank Bill Swap Rate Hurdle, which was up by 2.6 per cent a year over the same period.

Over the 12 months to the end of July the fund produced a return of 8 per cent, compared to a 1.9 per cent benchmark return.

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