US inflation-linked bonds will prove a popular hunting ground in the near future but Latin American equivalents are offering the best bets now.
Speaking to Citywire Global, Haywood (pictured) said they were looking to increase inflation-linked exposure across the portfolios they run.
‘It is certainly the case that we have been looking to build on our existing inflation linked exposure in the US, but we are yet to pull the trigger on this in the GAM Star Dynamic Global Bond fund,’ he said.
‘US inflation linked bonds suffered large losses, for a treasury asset, in 2013 and have recovered well this year. But, we see better opportunities for inflation-linked securities in the emerging world and have consequently been buying these assets in Chile and Brazil.’
This has seen Sheard and Haywood buy into a Brazilian 2022 inflation-linked bond, which current yields 5.8%. Haywood said the yield had reached a peak of almost 7% in January and was up from around 3.1% at the start of 2013.
They now hold 3.5% of the €194 million GAM Star Dynamic Global Bond fund in inflation-linked bonds, with two-thirds of this being exposed to the emerging markets.
Haywood added: ‘We don’t consider EMD to be necessarily cheap, but we certainly feel it is attractive on a relative value basis when compared with what is available in the developed world.’
‘Furthermore, economic headwinds are likely to see emerging market interest rates go sideways or down at a time where the developed world is looking down the barrel of rising interest rates / bond yields.’
Meanwhile, in the pair’s flagship €6.8 billion Julius Baer BF Absolute Return fund, they have a 4% exposure to inflation-linked bonds, evenly split between developed and developing world debt.
‘We have around $180 million worth of US linkers in our flagship Absolute Return Bond fund, where they provide a hedge against rising inflation and are better aligned with that strategy’s cash plus target.’
Elsewhere, they have been buying up longer-dated government debt, which, Haywood said, is a largely contrarian call in the current climate.
‘The “big short” has become a consensus trade and we were opportunistically buying longer dated treasuries in our flagship Absolute Return Bond fund during Q2.’
‘These longer dated US government bonds were amongst the best performing securities in the Absolute Return Bond fund during May.’
The GAM Star Dynamic Global Bond fund returned 14.3% over the three years to the end of June 2014. This is while its Citywire benchmark, the Citi WGBI TR USD, rose 4.77% over the same period.
Meanwhile, the Julius Baer BF Absolute Return-EUR B has returned 5.9% over a three-year period in which the average manager in the Alt Ucits – Bond Strategies returned 7.7%.