By Elliot Gulliver-Needham
In this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from Andrew Lake, head of fixed income at Mirabaud Asset Management.
What changes have you made over the fund’s lifetime?
We’ve gone through a huge amount of change over the last 10 years. So we had the euro crisis, the oil crisis, and Covid.
There’s been an awful lot of change within the financial markets, regulatory changes that have happened with the advent of the climate transition, a lot of restrictions that have come into the market as a result of what happened with the Financial Crisis, and we’ve had to react to that.
So we’ve had to be much more aware of short-term volatility, which is something we’ve seen a lot more of recently.
But also, liquidity has been much more difficult to manage over the last 10 years, with regard to buying underlying cash bonds.
One example of that would be last year where we had the Powell pivot, where you found even in big companies like Apple, which have a huge amount of bonds outstanding, it was very difficult to buy and sell bonds during those periods of stress.
What is the biggest mistake that you’ve made managing the fund?
The biggest mistake was back in 2018.
As I mentioned before, we are quite cognisant of these mini cycles with credit and duration risk. For fixed income investors, those are the two areas where you spend most of your time trying to work out what’s going to drive performance.
Back in 2018, it was another Powell pivot. We were expecting interest rates to go up, and actually what happened was he pivoted very early on and said we’re going to start cutting rates.
The market moved very quickly, almost to the same degree as we saw in the fourth quarter of last year, and we were caught with a much shorter portfolio than perhaps we should have had.
So by the time we made the adjustments to reflect the new regime for interest rates, the money had already been made and lost.
We had a pretty bad relative year. We had a positive year for returns, but it wasn’t the 15 per cent that the market made, it was more like seven or eight.
Which of your bonds are you most excited about?
It’s a difficult one, because a lot of the money’s already been made and markets are quite tight. But what I would say, is we’re still pretty positive on consumer discretionaries as a sector.
It’s a very large sector that includes autos, travel, leisure and so forth, but we’re still seeing quite a lot of momentum in terms of, not revenge spending after Covid, but almost escapism.
So within that sector, we like cruise ships. Carnival Cruises has a very strong pathway of bookings for the next 18 months.
It also has a sustainability angle as well, as they’re looking at reducing their carbon footprint and more efficient ways of utilising fuel, as well as carbon neutral ships coming online.
So I think all of these things add up to a company that we still like, and they’re also very much incentivised to go back to investment grade.
If you think about where we were in Covid, when the world shut down, it was these companies that actually suffered the most, because there just wasn’t any travel, and now they’re building up their businesses.
So whilst a lot of the money has been made, there is still a pathway of momentum to have a good return from these kinds of companies at the moment.
Do you see any significant market moves happening because of the upcoming election?
Only if the Conservatives win, because I think the market is already pricing in a Labour victory.
Labour has been very clever insofar as they haven’t given us an indication of anything radical that they would do, other than say they will be more business friendly and not put up taxes.
So the market is fairly sanguine with regards to a Labour victory. I think any real problems with the market will only come if we see any unexpected changes as we go through the next several years.
The market is far more focused upon interest rates in the economy at the moment, and really, that’s the Bank of England’s question.
Productivity, education and so forth is something that government will have to deal with later on, but for the next six months or so, we’re not going to really see what Labour’s thinking on how they’re going to boost productivity within the UK.
