What can investment managers do when key attributes of bond investing — yield, diversification from equities — are low, asks Pendal’s Vimal Gor.
“You take market factors that already exist … and build a new asset allocation process around them,” says Vimal, who has pioneered “alternative duration” investing in Australia for several years.
The idea is to identify factors in different trading environments — such as momentum, volatility, skew (which involves the implied volatility of options) — and use a strategy that takes advantages of these factors to achieve desired outcomes.
“We think the uptake of this sort of alternative duration thinking is going to be very material in the next few years,” says Vimal, who recently began specialising in this space.
A five-person team, headed up by Vimal, is focused on bringing new thinking and new opportunities to income clients.
(Vimal was previously head of Pendal’s Income and Fixed Interest team — then known as Bond, Income and Defensive Strategies).
Investors can consider alternatives to the bond market to achieve the attributes they want in their portfolios, says Gor. That means thinking about alternative duration.
Duration in fixed income markets is a measure of the sensitivity of the price of a bond to changes in interest rates.
“Global government bonds have been in a long-term bull market for 30 years. Yields have fallen as nominal GDP and inflation has fallen.
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“Ultimately, as global government bonds approach zero, the efficiency and effectiveness of fixed income as a diversifier to equities in a portfolio is dampened because they have less negative correlation to equities in a time of stress, and that’s one of the main reasons you want global bonds.
Three years ago, Pendal embarked on a project to better understand how to achieve the attributes that global government bonds traditionally performed, including diversification.
“How do we approach the asset allocation problem when government bonds aren’t as useful as the used to be?”
Gor and his team’s approach was to rethink what the post-Covid economic and market environment was like.
“It’s a new way of thinking about asset allocation. We took market factors that already exist … and built a new asset allocation process around them.”
That meant identifying factors in different trading environments – momentum, volatility, skew (which involves the implied volatility of options) – and using a strategy that takes advantages of those factors to achieve desired outcomes.
“For example, intraday momentum is a systematic strategy that works very well in periods of drawdowns. Foreign exchange carry works very well in periods when equity markets are going up.
“By identifying these factors, and their risk-return characteristics, we are able to blend them in a portfolio to get a specific outcome.”
Traditionally, investors approach portfolio construction by blending assets to achieve a 60 per cent growth assets, 40 per cent defensive assets, for example. That mix determines what an investor’s profile is.
“We are coming at it from looking at what outcome profile would we like, and how do we get there by bolting together these factors which have very long track records. It’s a very different way of approaching asset allocation.
“We use strategies based on different factors in the multi-asset markets and apply and change them as we go through the cycle, depending on the environment.”
Vimal Gor is Pendal’s Head of Alternative Duration.
Vimal’s new five-person team focuses on bringing new thinking and new opportunities to income clients.
Vimal was previously head of Pendal’s Income and Fixed Interest (I&FI) team (formerly known as Bond, Income and Defensive Strategies). Pendal I&FI is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
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