WEBVTT 1 00:00:00.372 --> 00:00:04.537 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:05.979 --> 00:00:12.662 Sometimes it seems to me that the world of credit and bonds and money markets and 3 00:00:12.662 --> 00:00:14.662 fixed income are viewed as rather stayed 4 00:00:14.662 --> 00:00:18.264 as an asset class compared to, for example, equities, which seem more 5 00:00:18.264 --> 00:00:20.264 exciting. 6 00:00:20.264 --> 00:00:24.436 Then enter 2025 with Trump, tariffs, the fight for the Fed, inflation versus 7 00:00:24.436 --> 00:00:26.436 growth, 8 00:00:26.436 --> 00:00:26.686 and also central banks diverging policies. 9 00:00:26.701 --> 00:00:29.929 I mean, for example, the ECB and the Bank of England cutting rates, 10 00:00:30.230 --> 00:00:33.953 and the US Federal Reserve staunchly keeping them flat. 11 00:00:34.296 --> 00:00:41.203 With me to make sense of a flurry of fundamentals is Jason Borbersheen, 12 00:00:41.203 --> 00:00:43.203 portfolio manager at 91 in London. 13 00:00:43.203 --> 00:00:45.203 It has been a hell of a year. 14 00:00:45.203 --> 00:00:47.203 In fact, it started at the end of last year, didn't it? 15 00:00:47.203 --> 00:00:49.203 Yeah, hi, Lindsay, absolutely. 16 00:00:49.203 --> 00:00:50.429 I mean, I think one of the things that's quite clear from the last year, 17 00:00:50.523 --> 00:00:56.835 but probably becoming increasingly apparent from the last five, is that fixed 18 00:00:56.835 --> 00:00:58.835 income is probably anything but boring. 19 00:00:58.835 --> 00:01:04.012 that presents risks that obviously also presents opportunities whenever there is 20 00:01:04.012 --> 00:01:06.012 elevated levels of volatility. 21 00:01:06.012 --> 00:01:10.113 The other thing which I think is very clear is the difference between sorts of 22 00:01:10.113 --> 00:01:12.113 fixed income. 23 00:01:12.113 --> 00:01:14.941 So longer dated bonds relative to shorter dated bonds are behaving very differently. 24 00:01:15.801 --> 00:01:18.832 Other countries to one another are also behaving very differently. 25 00:01:18.988 --> 00:01:22.223 You know, you mentioned the actions of the central banks of a couple there. 26 00:01:22.707 --> 00:01:24.707 We're seeing it in the bond markets of those two. 27 00:01:24.848 --> 00:01:25.926 And I think it's very important. 28 00:01:26.068 --> 00:01:31.935 for investors to distinguish between them, ultimately to, I think, navigate these 29 00:01:31.935 --> 00:01:33.935 quite choppy waters. 30 00:01:33.935 --> 00:01:39.243 Yeah, I thought of the other day, actually, in anticipation of this podcast, 31 00:01:39.243 --> 00:01:41.243 and when Lisa Cook, the Fed governor, 32 00:01:41.243 --> 00:01:46.782 got into a bit of trouble in the eyes of Donald Trump, I saw the long end of the US 33 00:01:46.782 --> 00:01:48.782 curve, the 30-year, 34 00:01:48.782 --> 00:01:53.751 the yields rising, the bond market falling, obviously, but the two-year was 35 00:01:53.751 --> 00:01:55.751 rallying with the yield. 36 00:01:55.751 --> 00:01:57.751 falling. 37 00:01:57.751 --> 00:01:58.141 And that trend has been in place also for over a year, I think. 38 00:01:59.082 --> 00:01:59.782 Absolutely. 39 00:01:59.782 --> 00:02:06.403 So this is something I think that investors should really start to pay a bit 40 00:02:06.403 --> 00:02:08.403 more attention to when they refer to fixed income markets. 41 00:02:08.403 --> 00:02:09.785 And as you say, often it's seen as a homogenous lot. 42 00:02:09.949 --> 00:02:15.324 But really, if you think about the starting point for a fixed income or bond 43 00:02:15.324 --> 00:02:17.324 market, 44 00:02:17.324 --> 00:02:19.324 it's what the central bank is doing. 45 00:02:19.324 --> 00:02:19.793 And as you get further and further from that. 46 00:02:19.824 --> 00:02:22.106 So if the bank is setting a one year rate. 47 00:02:22.572 --> 00:02:26.836 That's what you'll see in your bank accounts or your savings accounts in some 48 00:02:26.836 --> 00:02:26.997 format. 49 00:02:27.719 --> 00:02:31.383 You talk then about a two-year bond, the one that's maturing in 2027. 50 00:02:31.859 --> 00:02:33.726 That's going to have quite a close link to it. 51 00:02:33.984 --> 00:02:40.289 So in its price or in its yield, it's going to reflect what the current policy 52 00:02:40.289 --> 00:02:42.289 setting is and how the market then 53 00:02:42.289 --> 00:02:44.289 believes that's going to evolve. 54 00:02:44.289 --> 00:02:48.351 And at all points in time, the market has a view on whether it thinks rates are 55 00:02:48.351 --> 00:02:50.351 going to be more or less than they are currently. 56 00:02:50.351 --> 00:02:56.099 And then as you get further away from that two-year point, you hit five years, ten 57 00:02:56.099 --> 00:02:58.099 and so on, all the way out to, in the cases of some bond markets, 58 00:02:58.099 --> 00:03:00.099 you know, nearly to a hundred years. 59 00:03:00.099 --> 00:03:01.341 There were some sort of quite prudent issuance made in the COVID era. 60 00:03:02.005 --> 00:03:08.208 You are moving further from how influential the central bank is on that 61 00:03:08.208 --> 00:03:10.208 bond's price, 62 00:03:10.208 --> 00:03:12.208 on that bond's yield. 63 00:03:12.208 --> 00:03:14.536 You start to incorporate views on issuance, on fiscal dynamics, 64 00:03:15.021 --> 00:03:17.661 on the financial position of the country who is. 65 00:03:18.248 --> 00:03:23.854 issuing overall, as well as the growth and inflation drivers that will impact the 66 00:03:23.854 --> 00:03:24.152 central 67 00:03:24.152 --> 00:03:25.874 bank's decision on where to move rates. 68 00:03:25.897 --> 00:03:28.858 And I think all of those have become more volatile. 69 00:03:29.038 --> 00:03:35.858 That's made longer dated bonds increase in yields, but also, I think, offer, in a 70 00:03:35.858 --> 00:03:36.106 sense, 71 00:03:36.106 --> 00:03:37.842 a sort of mirage of safety. 72 00:03:38.514 --> 00:03:44.311 We've seen on a number of occasions, those longer dated bonds not provide the kind of 73 00:03:44.311 --> 00:03:46.311 performance you would like in 74 00:03:46.311 --> 00:03:46.999 situations when you need them to, whether that's during 75 00:03:47.500 --> 00:03:54.467 an equity risk-off like 2022 or post the Liberation Day move in which you saw 76 00:03:54.467 --> 00:03:56.467 equity markets fall and bond yields start to 77 00:03:56.467 --> 00:03:58.053 rise, eventually that seemed to trigger some sort of reaction from 78 00:03:58.693 --> 00:04:01.654 Mr Trump and how he was dealing with the tariff issue. 79 00:04:02.334 --> 00:04:08.889 But the shorter end, as you say, has remained, I think, quite solidly linked to 80 00:04:08.889 --> 00:04:10.889 economic fundamentals, 81 00:04:10.889 --> 00:04:12.076 growth and inflation, and how that will impact central banks. 82 00:04:12.107 --> 00:04:17.154 And I think this Lisa Cook episode in which it appears the Federal Reserve is 83 00:04:17.154 --> 00:04:19.154 trying to co-opt 84 00:04:19.154 --> 00:04:24.962 the or be co-opted by the administration has put a downward pressure to an extent 85 00:04:24.962 --> 00:04:26.962 on bond yields but I don't think 86 00:04:26.962 --> 00:04:31.942 it's the only thing driving that short end and there is a lot of I think opportunity 87 00:04:31.942 --> 00:04:33.942 in owning fixed income at 88 00:04:33.942 --> 00:04:35.356 the sort of five-year and below area whereby ultimately 89 00:04:35.419 --> 00:04:42.247 you're navigating some of the quite tricky issues that come from holding cash you 90 00:04:42.247 --> 00:04:44.247 know if you look over the long run at the real 91 00:04:44.247 --> 00:04:48.135 purchasing power of one dollar it will over 100 years now have nearly declined by 92 00:04:48.135 --> 00:04:50.135 85 to 90 percent. 93 00:04:50.135 --> 00:04:54.221 That's a pretty significant erosion in buying power, even if your normal amount 94 00:04:54.221 --> 00:04:56.221 has remained consistent. 95 00:04:56.221 --> 00:04:59.268 If you think then about your lack of participation in that region. 96 00:04:59.884 --> 00:05:02.646 off, let's say, two to five year maturity bonds, 97 00:05:03.367 --> 00:05:09.996 if they move in the way that they've done and shown the ability to more recently, 98 00:05:09.996 --> 00:05:11.996 you're going to have lagged that performance, 99 00:05:11.996 --> 00:05:13.996 you've got an opportunity cost. 100 00:05:13.996 --> 00:05:16.277 And I think finally, if they do that as well, you have this reinvestment risk, 101 00:05:16.277 --> 00:05:18.277 which many have, I think, forgotten, 102 00:05:18.277 --> 00:05:19.058 because we've had high rates for a period of time now. 103 00:05:19.121 --> 00:05:25.902 But if rates were to fall, rates were to move, because growth is weakening 104 00:05:25.902 --> 00:05:27.902 significantly, or perhaps the Federal Reserve is getting pressured, 105 00:05:27.902 --> 00:05:32.934 your ability in a year's time to achieve the level of yield that you can currently 106 00:05:32.934 --> 00:05:34.934 in your bank accounts is going to be significantly impaired. 107 00:05:34.934 --> 00:05:36.934 So there are quite a few reasons, I think, 108 00:05:36.934 --> 00:05:41.176 to start looking beyond just your cash holding or your perceived safety of owning 109 00:05:41.176 --> 00:05:43.176 just 110 00:05:43.176 --> 00:05:44.246 deposits and look into that shorter end of fixed income markets. 111 00:05:44.364 --> 00:05:45.598 Yeah, it's so much noise. 112 00:05:45.599 --> 00:05:47.973 I mean, that was a very good explanation of what's going on. 113 00:05:48.004 --> 00:05:54.020 And I'm just listening to all those fundamentals in addition to the ones that 114 00:05:54.020 --> 00:05:56.020 I put out in my introduction. 115 00:05:56.020 --> 00:05:58.020 And it must be. 116 00:05:58.020 --> 00:06:00.604 Quite exciting, but also quite bewildering when you sit down at your desk every 117 00:06:00.604 --> 00:06:02.604 morning, Jason. 118 00:06:02.604 --> 00:06:03.808 And I've got a question now, and it's two questions in one. 119 00:06:04.229 --> 00:06:07.972 How are you positioned at the Global Diversified Income Fund at 91? 120 00:06:08.393 --> 00:06:09.315 What's your strategy? 121 00:06:09.612 --> 00:06:15.214 And has that strategy materially changed over the last, I don't know, 8 to 12 122 00:06:15.214 --> 00:06:15.273 months? 123 00:06:16.026 --> 00:06:16.726 Sure. 124 00:06:16.726 --> 00:06:23.229 So we've been running mandates that are fixed income based or fixed income centric 125 00:06:23.229 --> 00:06:25.229 for multiple decades, whether they are 126 00:06:25.229 --> 00:06:29.433 preserve mandates for central banks, whether they are for high net worth 127 00:06:29.433 --> 00:06:31.433 individuals or institutions. 128 00:06:31.433 --> 00:06:36.796 So we have, I think, a strong heritage of having a global reach that helps us to, I 129 00:06:36.796 --> 00:06:38.796 think, understand the context. 130 00:06:38.796 --> 00:06:40.632 It is about more than South Africa or the United States or the UK. 131 00:06:40.851 --> 00:06:44.820 It's also about what's happening in Europe or New Zealand or Australia. 132 00:06:45.101 --> 00:06:47.695 You get that sort of mosaic picture and you find opportunities. 133 00:06:48.023 --> 00:06:53.023 I think also having a sort of depth of bench of people who understand, for 134 00:06:53.023 --> 00:06:53.114 example, 135 00:06:53.636 --> 00:06:57.741 non-government markets who are investing in credit markets is very important. 136 00:06:57.901 --> 00:07:04.604 So you are getting, I think, opportunities arise from more esoteric areas of those 137 00:07:04.604 --> 00:07:06.604 rather than just buying 138 00:07:06.604 --> 00:07:06.667 your vanilla or standard corporate bond. 139 00:07:07.269 --> 00:07:11.128 And then finally having a mindset which is focused on protecting capital. 140 00:07:11.394 --> 00:07:17.753 Anyone who's sort of looking at that area of fixed income markets at that shorter 141 00:07:17.753 --> 00:07:19.753 dated region is going to want to preserve capital. 142 00:07:19.753 --> 00:07:23.661 And we then translate that into a process which is something we stick to. 143 00:07:23.881 --> 00:07:30.347 So as you say, things are changing a lot, things look very different, but if you 144 00:07:30.347 --> 00:07:32.347 continue to do the same thing time and time again, 145 00:07:32.347 --> 00:07:34.628 I think you ultimately reap the rewards from that because you're less behaviorally 146 00:07:34.628 --> 00:07:36.628 biased. 147 00:07:36.628 --> 00:07:37.511 So we put the portfolio together from the bottom up. 148 00:07:37.573 --> 00:07:43.347 We're looking for those individual countries or corporates that are 149 00:07:43.347 --> 00:07:45.347 displaying attractive characteristics for us. 150 00:07:45.347 --> 00:07:48.222 We're thinking about that behavior of those securities rather than what they're 151 00:07:48.222 --> 00:07:48.437 called. 152 00:07:48.437 --> 00:07:50.941 That's crucial to your changing point. 153 00:07:51.600 --> 00:07:56.206 that ultimately some government bonds have started to behave more like you'd expect 154 00:07:56.206 --> 00:07:58.206 from an equity. 155 00:07:58.206 --> 00:08:02.874 So you need to be aware that just because something is called a bond, it doesn't 156 00:08:02.874 --> 00:08:04.874 really tell you very much about how it's going to behave in your portfolio. 157 00:08:04.874 --> 00:08:10.046 And the final thing is that we use direct methods of hedging the portfolio during 158 00:08:10.046 --> 00:08:12.046 times of risk to try and protect 159 00:08:12.046 --> 00:08:14.046 capital. 160 00:08:14.046 --> 00:08:17.359 And I think that leads to a good set of outcomes if you're trying to navigate the 161 00:08:17.359 --> 00:08:19.359 risks of purchasing power erosion or 162 00:08:19.359 --> 00:08:21.359 reinvestment risk. 163 00:08:21.359 --> 00:08:23.359 It's a way of solving for that. 164 00:08:23.359 --> 00:08:27.227 One of your colleagues kindly sent me a presentation and one thing that stuck out 165 00:08:27.227 --> 00:08:29.227 was a pie chart. 166 00:08:29.227 --> 00:08:33.790 And the pie was really generously skewed towards nations like Canada, New Zealand, 167 00:08:34.212 --> 00:08:34.912 Australia. 168 00:08:35.298 --> 00:08:41.360 And when we think of markets, we think of the United States and Europe and China and 169 00:08:41.360 --> 00:08:41.498 Japan. 170 00:08:41.844 --> 00:08:47.126 But you've diversified geographically quite, not dramatically, but 171 00:08:47.126 --> 00:08:49.126 significantly. 172 00:08:49.126 --> 00:08:50.344 I think this is something that is perhaps lost on 173 00:08:50.756 --> 00:08:57.563 some investors when they initially look at sort of shorter rated short dated bonds 174 00:08:57.563 --> 00:08:59.563 because you you sort of assume this homogenous behavior 175 00:08:59.563 --> 00:09:04.488 again but really there is a significant divergence between the outlooks for 176 00:09:04.488 --> 00:09:06.488 different economies as 177 00:09:06.488 --> 00:09:08.254 we can clearly see from how the us is shifting the global 178 00:09:08.817 --> 00:09:15.817 geopolitical order and also i think ultimately the financial position of those 179 00:09:15.817 --> 00:09:17.817 economies and this 180 00:09:17.817 --> 00:09:18.207 is something which has started to matter more and more. 181 00:09:18.696 --> 00:09:23.599 So it was most keenly felt, I think, in the tariff episode in April, 182 00:09:24.342 --> 00:09:30.029 where at one point bond yields started to rise at the point when equity markets were 183 00:09:30.029 --> 00:09:32.029 really falling. 184 00:09:32.029 --> 00:09:36.639 It speaks to the behavioural changes that are possible in fixed income, but also it 185 00:09:36.639 --> 00:09:38.639 speaks to why that was occurring. 186 00:09:38.639 --> 00:09:43.060 And if you put up a chart of the financial position of the country involved, 187 00:09:43.217 --> 00:09:46.076 so essentially it's budget and current account. 188 00:09:46.360 --> 00:09:47.321 surplus or deficit. 189 00:09:47.381 --> 00:09:49.983 So essentially, is it selling more than it buys? 190 00:09:50.024 --> 00:09:52.627 Is it collecting more revenue than it spends, etc? 191 00:09:53.588 --> 00:09:55.488 And you plot that against the yield change. 192 00:09:56.008 --> 00:09:58.608 There was a very strong relationship between the two. 193 00:09:58.768 --> 00:10:04.471 And the reason why I think that's interesting is that historically, 194 00:10:04.471 --> 00:10:06.471 sovereign bonds have occupied within investors' 195 00:10:06.471 --> 00:10:08.447 portfolios a very, I think, hallowed position, 196 00:10:08.650 --> 00:10:15.150 which is to say they almost didn't have a sensitivity to their financial variables 197 00:10:15.150 --> 00:10:15.210 or 198 00:10:15.210 --> 00:10:19.432 fundamentals because you knew that there was this sort of social, financial, 199 00:10:19.494 --> 00:10:23.041 political contract when you lent to an issuer. 200 00:10:23.812 --> 00:10:30.216 And if we look back over the last few years, I think the question of that 201 00:10:30.216 --> 00:10:32.216 contract's validity has been more and more at the 202 00:10:32.216 --> 00:10:34.216 forefront of investors' minds. 203 00:10:34.216 --> 00:10:36.865 So go back to the trust episode in 2022, look again at this tariff episode more 204 00:10:36.865 --> 00:10:36.963 recently. 205 00:10:37.466 --> 00:10:41.951 And what you're seeing is that investors are almost treating government bonds like 206 00:10:41.951 --> 00:10:43.951 corporate ones. 207 00:10:43.951 --> 00:10:47.794 They're looking at how indebted that nation is and how well able it is to pay 208 00:10:47.794 --> 00:10:49.794 its debts. 209 00:10:49.794 --> 00:10:50.013 And that is, I think, a big change. 210 00:10:50.076 --> 00:10:52.763 And it's why you then need this sort of geographical diversity. 211 00:10:53.380 --> 00:10:57.064 that you can invest in or blend to borrowers like 212 00:10:58.124 --> 00:11:03.730 Canada or Australia where there's a much better financial position than you're 213 00:11:03.730 --> 00:11:05.730 finding in for example the United States. 214 00:11:05.730 --> 00:11:09.612 And of course the countries that you've mentioned have liquid markets I mean 215 00:11:09.612 --> 00:11:11.612 people might say well 216 00:11:11.612 --> 00:11:17.097 I want to invest in the in the United States because of the liquidity factor 217 00:11:17.097 --> 00:11:19.097 it's not a problem for a fund like yours. 218 00:11:19.097 --> 00:11:21.753 No absolutely I think if you're talking about the debt market of any 219 00:11:22.284 --> 00:11:26.269 government bond of any sort of developed market, government bond debt market, 220 00:11:26.809 --> 00:11:33.172 then we're discussing here markets that turn over hundreds of millions and 221 00:11:33.172 --> 00:11:35.172 billions of dollars per day, 222 00:11:35.172 --> 00:11:37.172 even in the small ones. 223 00:11:37.172 --> 00:11:39.367 So there is ample liquidity for any kind of strategy to trade. 224 00:11:40.226 --> 00:11:46.070 Yes, the US is the most liquid and will remain so, but that doesn't necessarily 225 00:11:46.070 --> 00:11:48.070 convey a sense of being risk-free. 226 00:11:48.070 --> 00:11:50.773 Ultimately, it's about understanding what the upside and downside is for any 227 00:11:50.773 --> 00:11:50.912 position. 228 00:11:51.712 --> 00:11:56.771 Okay, now for a layman like myself, I need to get back to the simple stuff. 229 00:11:57.033 --> 00:12:03.697 The US Federal Reserve, the Lisa Cook episode, the clear dislike for each other 230 00:12:03.697 --> 00:12:05.697 displayed by 231 00:12:05.697 --> 00:12:08.681 Jerome Powell, the chair of the Fed and the president of the United States of 232 00:12:08.681 --> 00:12:08.819 America. 233 00:12:08.869 --> 00:12:11.072 Jerome Powell will be gone quite soon. 234 00:12:11.822 --> 00:12:16.338 And I think most of the Fed, most of the governors. 235 00:12:17.880 --> 00:12:20.583 are up for re-election at the end of February next year. 236 00:12:20.644 --> 00:12:22.425 I think I read that somewhere. 237 00:12:22.683 --> 00:12:28.589 The backdrop to this of course is a weakening US dollar and it's still the 238 00:12:28.589 --> 00:12:30.589 world's reserve currency. 239 00:12:30.589 --> 00:12:32.792 So I don't know, it just seems to me that something's got to give. 240 00:12:33.198 --> 00:12:36.284 First question, are they going to cut rates in September? 241 00:12:37.316 --> 00:12:43.722 So I think they are going to cut rates in September, but I don't think they're 242 00:12:43.722 --> 00:12:45.722 necessarily doing it because they've become an animal 243 00:12:45.722 --> 00:12:45.784 of the the administration. 244 00:12:45.894 --> 00:12:52.204 I think they're doing that because the most recent employment numbers suggest 245 00:12:52.204 --> 00:12:54.204 that the picture at the time when they 246 00:12:54.204 --> 00:12:58.169 last made a policy decision to be on hold was actually much weaker and they have a 247 00:12:58.169 --> 00:13:00.169 dual mandate. 248 00:13:00.169 --> 00:13:00.614 One is to promote maximum employment, 249 00:13:00.615 --> 00:13:07.372 the other is for steady price stability and clearly if you think that unemployment 250 00:13:07.372 --> 00:13:09.372 was higher 251 00:13:09.372 --> 00:13:12.778 and that job growth was lower than the information you had to hand during your 252 00:13:12.778 --> 00:13:12.807 last decision, 253 00:13:13.762 --> 00:13:20.503 you should perhaps then be more willing to reduce rates and I think at the Jackson 254 00:13:20.503 --> 00:13:22.503 Hole meeting, that's what Jerome Powell signalled. 255 00:13:22.503 --> 00:13:25.589 I don't think it was necessarily a sort of political co-option because of all the 256 00:13:25.589 --> 00:13:27.589 political pressure. 257 00:13:27.589 --> 00:13:29.589 I mean, that is clearly there. 258 00:13:29.589 --> 00:13:32.933 I wouldn't say that we have always operated in an environment that's free 259 00:13:32.933 --> 00:13:32.992 from that. 260 00:13:33.175 --> 00:13:39.878 You know, we can go back to the sort of 60s through to 80s and there was clear 261 00:13:39.878 --> 00:13:41.878 pressure and a clear lack of independence. 262 00:13:41.878 --> 00:13:44.941 It does tend to come more with the Republican Party when they're in power, if 263 00:13:44.941 --> 00:13:46.941 you sort of look at measures of 264 00:13:46.941 --> 00:13:48.747 central bank independence and the tax they tend to increase. 265 00:13:50.149 --> 00:13:56.973 The important thing I suppose is that the Federal Reserve continue to make unbiased 266 00:13:56.973 --> 00:13:58.973 decisions and they do so to 267 00:13:58.973 --> 00:13:59.856 protect those that both sides of that mandate. 268 00:14:00.520 --> 00:14:06.801 I think there is a risk through the Lisa Cook episode that that is prejudiced so 269 00:14:06.801 --> 00:14:08.801 the 270 00:14:08.801 --> 00:14:14.176 issue that's coming up is that there's a voting board to essentially recertify 271 00:14:14.255 --> 00:14:16.648 the members of the FOMC. 272 00:14:17.528 --> 00:14:19.309 So there's sort of 12 in total. 273 00:14:20.348 --> 00:14:22.751 There's a vote of seven to certify those. 274 00:14:23.610 --> 00:14:29.852 And with the removal of Lisa Cook and with the introduction of a number of other 275 00:14:30.673 --> 00:14:31.618 Federal Reserve members, 276 00:14:32.087 --> 00:14:38.212 Trump will essentially be able to control that panel if they are voting in alignment 277 00:14:38.212 --> 00:14:38.255 with him, 278 00:14:39.055 --> 00:14:39.852 as the suggestion is. 279 00:14:39.993 --> 00:14:43.149 And that would mean that essentially you sort of get control of the whole. 280 00:14:43.608 --> 00:14:44.853 off the Federal Reserve. 281 00:14:45.494 --> 00:14:48.746 And the concern for the market there is that then rates will be reduced. 282 00:14:49.384 --> 00:14:56.231 um unnecessarily so because inflation doesn't yet appear to have been completely 283 00:14:56.231 --> 00:14:58.231 tamed um and therefore long end of the 284 00:14:58.231 --> 00:15:03.117 bond market is saying well you're going to create me issues so i demand a higher 285 00:15:03.117 --> 00:15:05.117 yield whilst the short end is saying well i'm going to be kept 286 00:15:05.117 --> 00:15:09.860 low by the interest rate setting of the bank which is back to the sort of initial 287 00:15:09.860 --> 00:15:11.860 point about how much interest rates matter for 288 00:15:11.860 --> 00:15:12.328 different maturities i find it quite 289 00:15:12.344 --> 00:15:17.719 extraordinary that the members of the fomc can be under the control of somebody who 290 00:15:17.719 --> 00:15:19.719 clearly wants... 291 00:15:19.719 --> 00:15:25.544 interest rates low for for a couple of reasons we need not discuss those but it's 292 00:15:25.544 --> 00:15:27.544 a scary situation people talk of banana 293 00:15:27.544 --> 00:15:32.248 republics and this is my final point and your comment as well please jason i don't 294 00:15:32.248 --> 00:15:34.248 think america will become a banana republic 295 00:15:34.248 --> 00:15:36.693 but certainly there'll be bondholders around the world looking at this and 296 00:15:36.693 --> 00:15:38.693 saying this 297 00:15:38.693 --> 00:15:43.177 is not for me and start to disinvest yeah i think it's all about it's all about 298 00:15:43.302 --> 00:15:49.570 relative changes isn't it or incremental changes you know, eight years ago, you 299 00:15:49.570 --> 00:15:51.570 might have said, well, 300 00:15:51.570 --> 00:15:56.115 the institutional strength of the US is incredibly high, and I therefore have 301 00:15:56.115 --> 00:15:58.115 complete trust in it. 302 00:15:58.115 --> 00:16:03.607 Then today, you may say, well, I think that's slightly lower, and therefore I'm 303 00:16:03.607 --> 00:16:05.607 going to put slightly less trust in it. 304 00:16:05.607 --> 00:16:08.669 But I think we need to be somewhat careful with the couching of that. 305 00:16:09.169 --> 00:16:15.794 So I can understand why many are concerned that the US will lose its status. 306 00:16:16.480 --> 00:16:18.360 And it clearly has occupied a special one. 307 00:16:18.860 --> 00:16:24.220 And that leads many to think, well, naturally, the dollar must therefore erode 308 00:16:24.220 --> 00:16:26.220 very quickly. 309 00:16:26.220 --> 00:16:27.419 I don't think that things move in straight lines. 310 00:16:27.466 --> 00:16:32.958 And I think that the sort of simple story may not be the best one, particularly if 311 00:16:32.958 --> 00:16:34.958 it's well appreciated. 312 00:16:34.958 --> 00:16:35.521 So I think that could be a structural risk. 313 00:16:36.567 --> 00:16:38.099 It's been called for many times before. 314 00:16:38.567 --> 00:16:45.161 So I still think the dollar and having dollar exposure, particularly from a sort 315 00:16:45.161 --> 00:16:47.161 of emerging market context, can. 316 00:16:47.161 --> 00:16:52.399 work as a safe haven, can work as a store of wealth, if it's then attached to the 317 00:16:52.399 --> 00:16:54.399 sorts of investments we've previously discussed. 318 00:16:54.399 --> 00:16:55.860 And I think then also it's about increments. 319 00:16:56.126 --> 00:17:02.282 So for fixed income, if you're sat at the sort of two-year end of things, two to 320 00:17:02.282 --> 00:17:04.282 five-year end of things, 321 00:17:04.282 --> 00:17:07.860 as we tend to focus on, it is an issue, but it may actually help with capital 322 00:17:07.860 --> 00:17:09.860 gains, obviously, 323 00:17:09.860 --> 00:17:10.391 if rates are reduced and you own a two-year bond. 324 00:17:10.920 --> 00:17:15.319 you might end up ingraining inflation issues, but they may play out over five to 325 00:17:15.319 --> 00:17:17.319 10 years, not over 326 00:17:17.319 --> 00:17:19.319 12 to 24 months during which you're owning that fixed income holding. 327 00:17:19.905 --> 00:17:23.702 And so I think it's about sort of being precise in your implementation of that 328 00:17:23.702 --> 00:17:23.980 view, 329 00:17:24.444 --> 00:17:30.639 rather than sort of taking a sort of wholesale or sweeping conclusion from it. 330 00:17:31.280 --> 00:17:36.124 I did say I'd ask my last question, but I have one final one because I neglected to 331 00:17:36.124 --> 00:17:38.124 bring it up earlier. 332 00:17:38.124 --> 00:17:40.452 and that is emerging markets versus developed markets, EM versus DM. 333 00:17:40.491 --> 00:17:41.331 What is your stance? 334 00:17:42.495 --> 00:17:49.323 So we in this strategy adopt the principle that owning emerging markets in a dollar 335 00:17:49.323 --> 00:17:51.323 denominated fund still 336 00:17:51.323 --> 00:17:51.846 remains a quite volatile proposition. 337 00:17:52.479 --> 00:17:59.214 And I think the way that you sort of square that is that some of the developed 338 00:17:59.214 --> 00:18:01.214 markets are becoming more like emerging. 339 00:18:01.214 --> 00:18:06.029 So we've had this sort of thesis as a house that the developed world is showing 340 00:18:06.029 --> 00:18:08.029 incremental signs, 341 00:18:08.029 --> 00:18:11.914 all of the ones we've actually just pointed to probably, off historical 342 00:18:11.914 --> 00:18:13.914 characteristics that you might have expected from 343 00:18:13.914 --> 00:18:17.621 EM, while some emerging markets actually start to display some pretty orthodox 344 00:18:17.621 --> 00:18:19.621 policy, 345 00:18:19.621 --> 00:18:20.363 both monetary and fiscal decision making. 346 00:18:20.980 --> 00:18:27.863 The other point, I think, is that owning emerging markets in a dollar denominated 347 00:18:27.863 --> 00:18:29.863 strategy, when you remove the currency risk, 348 00:18:29.863 --> 00:18:33.379 and you're buying short dated bonds, can actually be quite compelling, because it 349 00:18:33.379 --> 00:18:33.470 can offer you 350 00:18:33.940 --> 00:18:40.007 A return profile that looks more like what you'd expect from a traditional 351 00:18:40.007 --> 00:18:42.007 short-dated developed bond, 352 00:18:42.007 --> 00:18:47.250 as most of the volatility or fluctuation in price from owning emerging markets 353 00:18:47.250 --> 00:18:49.250 actually comes from currency translation, 354 00:18:49.250 --> 00:18:49.297 not necessarily from the underlying asset. 355 00:18:49.914 --> 00:18:52.554 So I would say in this fund, it's a very small component. 356 00:18:53.242 --> 00:18:58.945 It's a fund that structurally is tending towards what we would view as 357 00:18:58.945 --> 00:19:00.945 traditionally safe assets, 358 00:19:00.945 --> 00:19:01.523 short-dated government and... 359 00:19:02.124 --> 00:19:07.649 corporate bonds within the developed world, it has some flexibility to invest 360 00:19:07.649 --> 00:19:09.649 in the emerging world. 361 00:19:09.649 --> 00:19:13.614 It isn't doing so dramatically at this point and where it is, it's in short 362 00:19:13.614 --> 00:19:15.614 maturity, currency hedged exposure. 363 00:19:15.614 --> 00:19:20.294 But I think for clients who are looking at fixed income more broadly and at longer 364 00:19:20.294 --> 00:19:22.294 dated maturities, 365 00:19:22.294 --> 00:19:24.528 then clearly there's a lot of opportunity there, but it's just not something which 366 00:19:24.528 --> 00:19:26.528 is in this fund. 367 00:19:26.528 --> 00:19:26.903 Jason, thanks so much for your extended time. 368 00:19:26.950 --> 00:19:30.450 Jason Bourbrachine is a portfolio manager at 91 in London. 369 00:19:31.540 --> 00:19:38.483 The views and opinions expressed in these podcasts are those of Lindsay Williams and 370 00:19:38.483 --> 00:19:40.483 various contributors and do not reflect the policy, 371 00:19:40.483 --> 00:19:42.225 position or opinion of any other agency, organisation, 372 00:19:42.545 --> 00:19:47.186 employer or company associated with StrictlyBusinessPodcast.com. 373 00:19:47.670 --> 00:19:54.623 Assumptions made on the analyses are not reflective of the position of any other 374 00:19:54.623 --> 00:19:56.623 entity other than the speaker or the author. 375 00:19:56.623 --> 00:20:01.092 And since we are critically thinking human beings, these views are always subject to 376 00:20:01.092 --> 00:20:03.092 change, revision, and revision. 377 00:20:03.092 --> 00:20:05.092 and rethinking at any time. 378 00:20:05.092 --> 00:20:05.670 Please do not hold us to them in perpetuity.