Europe’s biggest fund manager, Amundi, is telling investors that it is time to get back into the bond market. And it believes that reports of the death of the 60-40 portfolio are greatly exaggerated. That theory merely has spent time in the freezer, said Vincent Mortier, Amundi’s chief investment officer.
“Bond is back, and not only on screen,” Mortier jokingly told journalists in a media call on Tuesday.
With assets under management of some 1.925 trillion euro at the end of June, Amundi is Europe’s largest fund manager. Its recommendations are widely watched in the investment community.
Real returns, said Amundi, are emerging again in the bond market, and the correlation between bonds and equities is again switching from positive to negative, supporting bonds at the expense of equities. Furthermore, bonds stand to benefit from their safe-haven status, and can serve as a cheap way to insure a portfolio against a recession risk.
“Six months ago, one year ago, I remember back then we were talking about Tina - There Is No Alternative - to equities. Basically, it was very difficult to find any kind of value in fixed income,” said Mortier, who took on the role of Group CIO at Amundi in February.
‘Value has been restored’
“Times have changed quickly actually. Now we assess collectively that value has been restored in this space. It is time now to reconsider investment into fixed income and reallocate some money to loans or at least part into credit.”
Mortier cited four reasons for this recommendation. First, it seems the emergence of real returns again on the investment horizons, as market preferences have in recent months been rebalanced towards loans in general. “Risk-adjusted returns on bonds are back,” said Mortier.
Bonds as diversifier
The fund manager also believes that bonds are well placed as “a diversifier” in portfolios as bonds emerge from a period in which they were closely aligned with equities.
“It is fair to say that in the last period, particular in the first half, correlation between equities and bonds has been positive. For good reason. The market was in a price discovery process and was really after inefficient spikes. So there was a perfect storm in a way of returns,” Mortier said.
This situation has changed as markets are starting to focus again on economic growth. “Nowadays markets will start to focus more on growth. In this context we believe that there will be a negative correlation coming back again into the marketplace, and therefore bonds at large will again play their diversifier role,” said Mortier.
60/40 ‘was just put into the freezer’
This also means that those who have declared the traditional 60/40 allocations for portfolios will need to reassess their views, according to Amundi.
“I know that multiple market participants have said that the 60/40 allocation was dead. So it was just put into the freezer. Now it can make a comeback again,” said Mortier.
Amundi’s CIO said the third reason that justifies fresh investments in bonds is the safe-haven nature of government debt, in particular US Treasuries and German Bunds - widely recognized as shock-proof investments.
‘Bonds come to be a kind of safe haven’
“In case of market shock - whatever the reason, it can be financial, macro, geopolitical - bonds come to be as a kind of safe haven,” said Mortier. “So whenever you got uncertainties, investors are buying safe assets, and bonds, in particular government bonds, are considered safe assets. Therefore you also buy a cheap insurance premium for your portfolio which is of course interesting.”
Amundi’s fourth and final reason for getting back into bonds is the view that a recession risk is not yet properly priced into current markets, and that central banks in the end will not allow interest rates, especially those on the medium and long term, to rise too much. Such a limit would translate into more value in bonds.
Recessions risk not yet priced in
“We believe that the market is not totally well priced in the recession risks, which are near,” Mortier said. “We believe that when and if a recession starts to materialise, central banks will act upon it in order to control the rate curve and to make sure that long term rates are not jumping too much higher.”
Mortier said that adding US Treasuries to a portfolio also is a way to protect them from a recession. “You can have some capital appreciation going forward on the medium and long curve. So just a way to protect portfolios against a rescission, which of course we need.”