e-fundresearch.com: What can we learn from the SNB’s surprising decision to abandon its currency cap?
Ariel Bezalel: A key take-away from the SNB’s move is that central banks can only control markets for so long and that markets potentially underestimate the risk of other official controls unwinding. In this environment of heightened macro uncertainty, we continue to opt for a higher average credit quality than historically and remain very focused on portfolio liquidity.
e-fundresearch.com: How do you plan to make money in the fixed income universe in 2015 and to what extent has the ECB’s QE announcement influenced your portfolio positioning?
Ariel Bezalel: Overall, we continue to follow a barbell strategy, seeking to balance higher yielding positions against more defensive allocations to AAA-rated Australian government bonds (which are currency hedged) and the US dollar. We are in the camp that believes both growth and rates will remain “lower for longer” and we are focused on capital retention in this environment. In credit, we favour shorter duration paper, with pending call dates or maturities and positive carry. Senior secured paper continues to dominate this exposure and we prefer BB rated bonds, particularly in Europe. In terms of specific themes, we recently added exposure to the European telecom sector, believing a number of companies in this overcrowded space may be subject to takeover activity this year. Bank recapitalisation remains a theme in the Jupiter Dynamic Bond SICAV, although we have become a lot more selective, concentrating our exposure on older style tier 1 paper we expect will be gradually retired and replaced. This view fits with our broader yield-to-call strategy implemented earlier in 2014. We continue to find good special situation opportunities, such as our position in Argentina where we made good profits last year, and we are looking closely at India as a potential future candidate for inclusion in the fund. India’s economy should benefit from the fall in oil prices. We are also impressed with the country’s strong government and central bank leadership and believe an easing cycle is imminent. Although our allocation to the oil-rig theme has been volatile of late, we still see long-term value in the Mexican rig sector, which is our largest emerging market country exposure at the moment and we have been building more opportunistic positions in shorter-dated Russian energy names.
The size of the asset purchase programme launched by the ECB was generally in line with market expectations, but in our view provides no silver bullet for creating growth in the eurozone where deeper structural reforms are needed.
At €60bn a month, which includes existing ECB asset-buying measures, the programme met with a confused reaction from markets, while the euro initially sold off heavily. The “quantitative easing” (QE) appears to be open-ended, designed to run until September 2016 or, in the words of President Mario Draghi “until we see a sustained adjustment in the path of inflation, which is consistent with our aim of achieving inflation rates below, but close to 2% over the medium term.” Such government bond buying, due to start in March, is likely to boost growth in 2015, especially when combined with a sharp fall in oil prices, and be positive for risk assets. The fall in the euro is also likely to be positive for euro risk assets near term. However, as Mr Draghi pointed out, this growth is unlikely to be sustained unless national governments introduce major economic reforms, especially in the periphery.
At times like this, being able to take a dynamic “go-anywhere” approach has its benefits. While we have positioned the fund for a more challenging year in 2015, being nimble means we can remain alert to opportunities that may be presented by more uncertain conditions.
e-fundresearch.com: To what extent does fund size impact the efficiency and effectiveness of your investment strategy?
Ariel Bezalel: The Jupiter Dynamic Bond SICAV is managed on a ‘go-anywhere’ basis with the ability to invest globally and across the ratings spectrum. This active and flexible approach allows us to be nimble in the face of changing macro trends, to be innovative in seeking out credit ideas, and to drill deep in our understanding of company-level risks.
While we have not experienced liquidity challenges in trading the fund, we monitor liquidity on a continual basis. Our dedicated fixed income trading desk is a key source of information on market trends and their potential impact on individual bonds. Liquidity is monitored closely by our risk team and stringent limits on exposure to individual issues are applied to the fund.