Investors warned against going “too big” on bonds

7th October 2014

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The risks of taking too large a position in bonds “have never felt greater,” a joint research note by Threadneedle Investments and Columbia Management has warned.

The note by Jim Cielinski, global head of fixed income at Threadneedle and Colin Lundgren, head of US fixed income at Columbia said that the fallout in fixed income markets following the departure of Bill Gross from PIMCO has created new challenges for investors.

They said the volatility should be viewed as an opportunity to reflect on portfolio strategy, liquidity risk and firm risk.

“At this stage of the cycle, moderate size positions and capacity sensitive asset managers are most likely sized for success. The risks of going big and being wrong have never felt greater,” they warned

Low and potentially rising interest rates, poor liquidity and this shake-up at the top of the asset management world are presenting major challenges for fixed income investors, they said.

“The result has been increased uncertainty, volatility and downward pressure on asset prices. Several strategies can help mitigate these risks: focusing on the most attractive parts of the market such as corporate bonds; recognising liquidity constraints posed by mega managers; and utilising market disruptions that don’t have lasting effects as investment opportunities,” they said.

While Cielinski and Lundgren urge caution, they said that “investors shouldn’t paint all bonds with the same brush”.

They said that while government bonds appear unattractive across most developed markets, corporate bonds still offer reasonable yield premiums with attractive credit fundamentals, moderate risk profiles and historically low default rates.

“Though no firms are immune to liquidity challenges, right-sized asset managers – those large enough to have deep research resources, but not so large they can’t to be nimble and impactful – appear best positioned to weather liquidity storms.

“Recent market dislocations, driven by concerns related to one super-size manager, may in fact be creating attractive opportunities for long-term investors who can selectively buy at cheaper prices in investment-grade corporates, high yield, mortgages and asset backed securities,” the pair said.

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