For investors trying to make informed decisions about their money, the “noise” from market events can be deafening. There are inherent dangers, in particular, for fixed income investors who fail to discern what’s important when it comes to the often cryptic messages of the Federal Reserve and its storied move to raise interest rates. But getting caught up in that noise can lead to poor outcomes.
While Fed developments should not be ignored, they should also not be an obsessive focus as they are only one element driving the markets. Investors should think twice about flocking to short-term bonds out of a fear of rising rates, considering that the Fed most directly controls the short end of the curve through monetary policy. The principle of ignoring the noise extends beyond the central bank to any number of macroeconomic events— from geopolitical instability to labor market shifts—that grab the market’s attention and disorient the investor before progressing toward irrelevance. It’s critical for asset managers to build portfolios, with discipline and confidence, based on a long-term horizon that considers a more holistic view of the marketplace and goes beyond the latest headline or Fed meeting.
Taking that holistic view means looking at a range of influential factors, including the role of the European Central Bank (ECB), which is arguably having a bigger impact on U.S. investments than the Fed. The ECB’s level of purchases in Europe is crowding out its domestic investor base, prompting significant interest in U.S. credit from European investors. The interest from institutional investors has dramatically increased. This creates a new marginal buyer as Europeans look to the U.S. Certainly, in some areas of the corporate bond world, that dynamic is impacting prices and arguably the shape of the corporate yield curve as much as what’s happening domestically in the U.S.
By recognizing the role of that international interest in buying U.S. bond funds, and its impact on supply and demand, globally-minded asset managers can gain new insights. They can then tackle the question of whether they are witnessing a short term trade or a longer term strategic allocation. If this is a short term tactical allocation, asset managers would need to be cautious, and more nimble, to avoid being in the way of selling pressure when Europeans return to their domestic market.
The potential benefits to “investing through the noise” are also aptly illustrated by developments in the energy sector last year. Oil prices ticked along at $100 a barrel before they began collapsing. While few were able to predict that dramatic plummet, skilled portfolio managers were able to actively pursue opportunities that emerged as a result of lower prices. The key, from a value perspective, was to avoid positions that depended on the oil price recovering to a certain level or not breaching a certain level on the down side. That ultimately meant identifying, amidst that generic demise, high-quality names with the ability to raise financing in capital markets and to withstand oil price fluctuations.
That strategy depends on a long-term view of value, and would generally be derailed by short-term plays that focused on where the oil price would be at the end of the quarter or year. The key was to buy issuers that would be good investments independent of a rising oil price based on the strength of their balance sheets. The focus on opportunities among struggling issuers that emerged as a result of the fallen oil price—ultimately among the refiners and pipelines— drove performance among many of our strategies in Q1 of this year.
Most eyes have been focused on the Fed. But the reality is that the Fed has held a captive audience for more than five years now with its well-publicized intention to raise rates, and that may extend to 2016. Investors need to be able to analyze and weigh developments appropriately. And without a broader perspective, it’s easy to misinterpret the impact of Fed moves and make poor investment decisions. For asset managers, we believe the focus should instead be on embracing a philosophy that drives through all mandates, building a portfolio not simply based on the latest headline or soundbite, but on a long-term view that offers a level of protection from the “noise” of market events. Because while the noise will change, the abiding narrative will stick around.
Andrew Chorlton is Head of U.S. Multi-Sector Fixed Income for Schroder Investment Management North America, Inc. The firm is an indirect wholly-owned subsidiary of Schroders plc (SDR.L), a global asset management company.
The views and opinions contained herein are those of Andy Chorlton, Head of US Multi-Sector Fixed Income, June 2015 and do not necessarily represent Schroder Investment Management North America Inc.’s house view.
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