Some 57% of delegates at Expert Investor Bilbao last week said they will step up their allocation to convertibles, while none are planning to decrease it. This strong appetite for convertible bonds stands in sharp contrast with other fixed income. Some 56% of fund buyers in the Basque country plan to decrease their exposure to government bonds in the next 12 months, the highest percentage we ever recorded in Europe. Even high yield bonds, with 20% buyers as well as sellers, cannot match the popularity of convertibles by a long shot.
So Martin Kuehle, who manages the Schroders Global Convertible Bond Fund, found an accommodative crowd in Bilbao. “If you go into cash [because you fear a market correction], the risk is to miss out on a further equity rally,” he said. And according to Kuehle, the current market correction is only momentary. “Taxi drivers and hairdressers haven’t yet invested in equities, so I don’t see the trigger [for a more serious slump].”
Are we in a bubble?
The audience was split on the question whether bond and equity markets are currently in a bubble phase (see chart). How surprising, the two long-only equity fund managers who
attended the event were not. Their arguments seemed not entirely convincing though.
“Equities are not in a bubble compared to other asset classes,” said Kyrill Pyshkin, a global equity fund manager for Mirabaud. “And valuations of the MSCI Europe are at the same level as 1999,” he added. Though it’s true that global stock markets have doubled in value on average since April 1999, they crashed a year later.
Piling into cash
So it might be prudent to incorporate some safety into your portfolio. Besides stocking up on convertible bonds, Basque fund buyers are even more overwhelmingly doing that through absolute return: almost three quarters of them plan to increase their exposure, significantly more than the European average. Absolute return funds often have a wide investment mandate, and can invest tactically.
It’s exactly this diverse set of return drivers that is the best asset of a fund in turbulent times, says Craig Moran, manager of the M&G Dynamic Tactical Allocation Fund. Flexibility enables you “to rebalance your portfolio to the assets that have just done very badly, so you need to be quite tactical,” he says. According to Moran,the current investment environment also asks for a higher cash weighting. “We have more cash now than during the past three years because other assets have done so well. Despite it yielding so little, you can’t lose a lot of money by investing in cash, and you can deploy it quickly again.”