The market’s focus over the year to date has been dominated by concerns over the potential actions of central banks, and perceptions over the underlying strength of the global economy. Will the European Central Bank taper before September? Does the new regime at the Federal Reserve signal a change in approach to policy? How much will Brexit influence the Bank of England’s Monetary Policy Committee? And just how strong is underlying wage growth in Europe?
Whilst all of these factors are very worthy of consideration – and regularly demand analysis and debate in our own strategy meetings – the influence of bottom-up stock selection, including the term structure of credit curves, is equally as important for high conviction managers.
It becomes even more important in prolonged periods of low macro volatility, which are actually more frequent than a cursory glance of the financial press would have you believe. Actively managing portfolios from a bottom-up perspective and sweating the assets is of most importance in times like these.
If we are able to lend to a corporate for the same potential return for 10 years as we would get over 30 years (an increasingly common feature of global credit markets after the recent period of performance and credit curve flattening) why would we not effect such a switch in our portfolios?
We are continually reassessing our sector recommendations too. Does our telecoms analyst continue to see value in his sector? Or would the portfolio’s risk budget be better expended in a sector with a more stable M&A backdrop and that is less prone to event risk?
Managing fixed income portfolios is often assumed to be all about asset allocation and interest rate risk – at Kames we see the bigger picture.