The future looks bleak for bonds, say Alt Ucits specialists

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Absolute return fund managers and strategists offered a scathing outlook for fixed income in the coming year at the Fondsmesse 13 event in Zurich and questioned investors' use of bonds as a diversification tool.

A roundtable featuring fund managers from Threadneedle and Swisscanto, as well as product specialists and strategists from UBS and Amundi, said the role of bonds has changed and other financial instruments may be better suited.

Jacques Keller, head of global fixed income product specialist at Amundi, said: ‘The main question now is what’s the role of bonds in an institutional investor's portfolio for the coming year?’

‘Bonds have long-held the capital protection role in funds but now I think you have to look at options, at derivatives and other financial instruments in order to achieve that.’

With government bond yields being suppressed by a spate of central bank easing, Keller said investors could expect a difficult 12 to 18 month period for sovereign debt.

Also questioning fixed income allocations was Stefan Lecher, global head strategist at UBS AM, who said investors had become blinded to what they were actually using bonds for.

‘In absolute return strategies, investors may have exposure to emerging market equities and growth equities and think "I will add high yield bonds to diversify", but that is not what they do.’

‘If you look at the fundamentals of high yield bonds, they are not offering you diversification. Investors have to know what they are adding and why, because this move has not diversified risk at all.’

The bleak outlook for bonds echoes comments made by economist Peter Perkins at the Citywire Berlin 2012 event where he said, unequivocally, there is nothing left for bonds.

In the Zurich Q&A session, it was also suggested by the group there was little chance of bonds retaining the strong performance which had seen them become an investor favourite and receive huge amounts of inflows in 2012.

Elsewhere in the discussions, Matthew Cobon, who runs the Threadneedle Target Return Gross, said he anticipated a difficult year for the United States politically and also for all economies with strong ties to the commodity super-cycle.

‘We are going to have look at allocations on a more idiosyncratic basis rather "emerging markets" as one all encompassing asset class,’ said Cobon, who is also Threadneedle's head of government and currencies.

‘We think all those economies heavily geared towards commodities offer a lot less value than those which have little exposure or dependence.’

‘The central case would be Brazil, a country which has benefited strongly from commodities growth and demand, but we do not think it is in a good position going into 2013.’