Investment consultants are encouraging investors to use non-traditional bond fund strategies like unconstrained bond fund strategies in their portfolio within the fixed income space where most markets are overvalued.
Rossen Djounov, managing director and head of Asia at GAM, told Citywire Asia that investors have consistently reduced exposure to bonds, and it reached the level that it’s no longer prudent to reduce exposure further.
‘If you need to own bonds today, what do you do? Where do you go? If interest rates were to rise, it’s practically and mathematically impossible for traditional active or passive bond funds to generate positive returns,’ he said.
Djounov said the 10-year bull market after the global financial crisis have really pushed the valuation of many asset classes to levels that are perhaps priced at a very optimistic outlook.
In the past, investors were rewarded for taking risks irrespective of whether they pick active stock managers or invest in passive investments but that is set to change.
‘The environment going forward is unlikely to be the same as what we experienced in last six seven years,’ he said, adding that it will not be a liquidity-driven market rally.
However, Djounov said he believes dispersion in market will increase and opportunities will present themselves to good, sound investment strategies that allow portfolio management teams to be able to pick up interesting ideas, and at the same time avoid overvalued assets, markets, countries or sectors.
In addition to unconstrained bond strategies, investors could consider including alternative strategies like systematic strategies, as well as alternative credits strategies such as catastrophe bonds and insurance-linked securities in their investment portfolios.
By including alternative strategies in their portfolios, investors can expect to reduce their portfolio co-relations to traditional assets and at the same time generate consistent positive returns, Djounov said.
Djounov said alternative strategies would also help fund managers to generate excess returns over traditional benchmarks for investors.