Tristan Sones, AGF Investments’ vice president and portfolio manager for fixed income, tells WP how investors should react to the changing fixed income environment
The mind of the average investor in 2019 is justifiably clouded with a dizzying concoction of uncertainties: the reek of 2018’s stock market volatility still lingers; the sad circus of Brexit has just been granted an extended run; dimming growth forecasts have become the worldwide norm; and the US-China trade war, despite falling from the headlines, continues to smoulder.
With so much downside risk plaguing the market, equity investments can lose much of their appeal, making fixed income plays and the relative certainty they provide an attractive solution for investors.
“When you talk about volatility,” says Tristan Sones, AGF Investments’ vice president and portfolio manager for fixed income, “the actual fixed-income volatility has been close to historic lows. Bond yields have been trading in a very, very tight range but recently broke out to the downside.”
Sones admits that the current trajectory of growth is “not great”, particularly after the Federal Reserve’s recent refusal to further increase interest rates, but he is still optimistic that some of the bigger headwinds preventing growth will eventually sort themselves out..
“I still lean slightly toward ‘this is the pause that refreshes’ as opposed to something worse from a growth standpoint,” he says. “There are still quite a few levers being pulled, whether it’s China stimulus or the Fed now on hold. There are reasons to think that there’s still a lot of support.”
Sones is also relatively optimistic when considering two nagging global headaches, Brexit and trade between the US and China, and the stabilizing impact their eventual, possibly imminent resolutions will have on the fixed income space.
Describing both conflicts as “somewhat self-inflicted”, Sones feels the uncertainty around them “has, in some cases, been shaken off quite a bit. But when it’s at its peak in terms of pessimism surrounding those scenarios, you’ve seen more of a risk-off type of environment where plain vanilla government securities – treasuries or Government of Canada bonds -- have done quite well.”
That kind of solid performance will be music to investors’ ears, particularly with subdued growth on the horizon. “It hasn’t been your normal business cycle. We’d argue that you’ve seen less amplitude and more wavelength, and because of that you can have this prolonged period of more subdued growth for longer,” Sones explains, adding that AGF doesn’t project prolonged expansion above 2% in the near-term. “It’s hard to compare this business cycle with that of typical business cycles because the policy tools that were used have been so different.”
When central bank stimulus is withdrawn and money becomes more expensive overall, as we saw in the US recently, Sones believes there is a shift in focus from more momentum-driven trading to that of strengthening fundamentals that is likely to benefit active managers. In addition to requiring more practicality and complex analysis from financial managers, this environment is also highly conducive to increased diversification.
“When you do that fundamental analysis and you have a story that you really believe in, whether that’s a company or a country, you’re probably going to run higher concentration than you normally would,” Sones says. “That means you really need to stay disciplined in your overall portfolio weights – really looking at that weight from a risk standpoint – and being disciplined in terms of not having too much, but enough to have it be worth your while if you get it right.”
As the fixed income universe expands and the breadth of attractive choices increases, Sones encourages investors to be disciplined when approaching their individual portfolio weights.
“You probably don’t want to be too concentrated in any one category right now,” he says. “That’ll give you the flexibility to prepare for what’s to come.”