Interview with Ignacio De La Maza: "Fixed-income investments should also be flexible"
THE INVESTMENT: Mr De La Maza, to what extent have the needs of bond investors changed in recent years?
Ignacio De La Maza: When I switched to investment management 13 years ago, investors invested in very specific areas. Boasting security for their capital in the first place, they bought government bonds with short maturities. For higher yields, they resorted to high yield bonds.
It's different today. While funds focused on specific areas or themes are still justified. However, there is an increasing demand for results-oriented funds.
Can you describe that more exactly?
De La Maza: Investors are increasingly looking for investment instruments that barely fluctuate or provide a positive total return. On the other hand, exposures in certain investment areas are less in demand today. At the same time, there is a general trend towards passive and, in particular, passive fixed income investments. That worries me.
The investment: How worried?
De La Maza: Many of these products are closely based on a bond index. For equity indices, companies' market capitalization and investor expectations of corporate profit growth play a key role. For most bond indices, bond issuance is a key criterion for their inclusion in the index, with the highest-rated companies or states being the most heavily weighted in the index. This is dangerous. Investors should ask themselves whether it really makes sense to have such refinancing-prone borrowers in their portfolio when their economic cycle is well advanced.
That makes sense, but a decent return has existed for years only for risky bonds.
De La Maza: I also take a critical look at the reviews. We live in an inverted world when investors are prepared to accept negative returns on bonds. Certainly there are technical reasons for this, such as in Switzerland, where the central bank pursues a negative interest rate policy, or in German government bonds, which can protect against political imponderables in Europe. But in terms of the economy, you really have to look black to make such investments meaningful in the long term. "
Will not there be a turnaround soon? The Fed is gradually turning to a more restrictive monetary policy.
De La Maza: The unconventional monetary policy is responsible for high bond prices and higher correlations between asset classes. Of course, with central banks pumping trillions of dollars into the market, this additional demand is driving up prices. But the Fed exit from quantitative easing is not necessarily the signal for a turnaround on the bond markets. It's not that easy in my opinion.
Can you please explain this to us in more detail?
De La Maza: That's best done with a life-like example. I am a threefold father. Nothing changes life as much as a child. It is a new variable in your life to which you have to adapt your entire behavior. Moreover, this new variable is not a short interlude, but permanent. If you like, the unconventional policy of the central banks is a new variable that could accompany our lives longer than many expect.
That means that loose monetary policy will not end soon?
De La Maza: The original intention of the central banks was to use the quantitative easing as an emergency measure. However, ten years have passed since the financial crisis and the US Federal Reserve only now begins to reduce its asset purchases. The European Central Bank and the Bank of Japan (BoJ) are still in loose mode. And what many forget: The BoJ has been running its quantitative easing intermittently since 2001. At the moment it does not look like it's going to change soon.
They do not sound enthusiastic. What do you fear?
De La Maza: My colleagues at Janus Henderson Investors see many parallels between the West and Japan. Nobody can be sure that we are not following the same path as Japan and trapped in a scenario of deflationary low growth. Or whether the US and Europe are steering a new course that could lead to stronger growth and higher inflation. No matter which of the two scenarios occurs, it will have a significant impact on interest rates, leverage ratios and the business environment, and thus on the appropriate levels of bond yields and spreads.
What is your solution to this dilemma?
De La Maza: Since two such opposite developments are possible, I can deduct a lot from flexible fixed income investments. This means funds that are not tied to a benchmark and can invest strategically. They are more likely to be better prepared for the uncertainties of the markets. As market conditions change, they can increase or decrease their interest rate sensitivity, switch to other fixed income asset classes or other regions. For them, volatility is less a threat, but more of an opportunity that they can use.
They themselves had to prove a high adaptability in their lives. How did she shape that?
De La Maza: I was an ambitious athlete. I started my athletic career on the basketball court until an ankle injury forced me to switch. That's why I first rowed and ended up playing rugby, where I also played in the Spanish national team. Of all the sports I have played in my life, rugby has probably taught me the most values, such as teamwork, responsibility and integrity.
To what extent do you accompany these sporting values in asset management?
De La Maza: After my sports career, I wanted to expand my education in finance and change to asset management. I continue to love sports and am convinced that the ability to react quickly and decisively and to develop a new strategy in changing circumstances is also of great value in asset management. As with rugby, you also want to avoid investing in assets and being unable to move. I think 2018 could put investors to the test in this regard. A flexible approach to fixed income is therefore likely to be of great benefit.
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