Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
G10 government bonds traditionally provided investors with a unique combination of positive yields, low volatility, and ballast for risky assets - the "40" in "60:40". Yet for many years now, G10 government bonds have struggled to deliver on these qualities.
Their yields have sunk to exceptionally low - even negative - levels. Their prices have therefore become vulnerable to the slightest uptick in inflation. Even their ability to serve as ballast is in question, with US and European interest rates already stuck at or below zero. As a result, investors have found themselves lacking a critical tool in portfolio construction.
Until now, that is. The last decade has seen a major change in the global economic architecture: the emergence of China as the world's second superpower.
The Chinese economy is already the largest in the world on some measures, and is growing much more rapidly than those of the US or Eurozone. China is not suffering from the ‘secular stagnation' which has plagued the G10 for the last decade. And China navigated the SARS-CoV-2 pandemic with a fraction of the economic damage the US and Europe incurred.
The result is a government bond market second in size only to the US, linked to an economy which still enjoys high growth rates and a normal economic cycle. With consistently positive yields, low capital volatility, and a proven record as diversifiers for global risk assets, China Government Bonds are set to be one of the major reserve assets of the coming decades - and a valuable addition to any global portfolio.
How are you positioning your portfolio to prepare for the global recovery from the Covid-19 pandemic?
The 1167 China Government Bond Fund will aim to give investors access to the three key benefits of the asset class - income, low volatility, and portfolio ballast - in a well-designed and cost-effective product.
Holdings will be limited to China Government Bonds only - the Chinese equivalent of US Treasuries or UK Gilts. Many products opt to add bonds issued by state-owned banks or local governments into the mix, in order to increase portfolio yields marginally in return for taking some credit risk. We do not believe that this trade-off makes sense. The purpose of a government bond fund is to provide exposure to pure sovereign liabilities of the country in question: they should therefore stick to government bonds, and not be contaminated with lower-quality credit risk.
In the manner of traditional active bond fund management, the duration of the portfolio will then be actively managed with the objective of maximising the risk-adjusted returns available. In the upswing stage of the economic cycle, when the yield curve is steepening, the portfolio can be focused on shorter maturities, reducing duration. As the cycle matures and the yield curve flattens or inverts, a longer duration becomes optimal, in order to capture potential capital gains from a rallying yield curve.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
China is already by some measures the largest economy in the world - accounting for 18 percent of world output on a PPP basis and around one fifth of all world trade. The Chinese currency, meanwhile, makes up 11% of the IMF's basket of global reserve currencies.
Yet China's share in many investors' portfolio is much lower than these magnitudes would suggest - and especially on the bond side. For global investors, China Government Bonds are often the largest de facto underweight in their asset allocation.
With the opening up of the China Government Bond market to foreign investors via the Bond Connect system - which allows funds like the 1167 China Government Bond fund to maintain custody in Hong Kong with Northern Trust, its global custodian, while dealing seamlessly via the Bloomberg trading system - it is likely that many global investors will be seeking to redress this underweight in the months and years to come.
