For Mr Husain, one of the themes he incorporates through his processes is behavioural finance. “What this tells us is forecasting has been proven to underestimate volatility. Every forecaster underestimates volatility, over both the short- and the long-term. Sterling at parity to the dollar would be a 2.8x standard deviation event. This is not a crazy scenario,” he adds.
While Mr Husain believes fixed income has done well in meeting its traditional objectives, given the current environment of low rates and divergent policy, he says it will be difficult for fixed income to continue to service its purpose in a traditional way.
“Investors are at a crossroads. If they turn left, it means using fixed income as a return and income-seeking asset class. By turning right, investors are accepting fixed income’s role as an anchor: a diversifier. If you turn right, you cannot be heavily invested in areas such as high yield or emerging market debt.”
Elsewhere, Mr Cunliffe says, “we like the idea of having long-dated sovereign bonds and short-dated corporate bonds. It works well because if central banks are not really in a position to deliver, then if it turns out to be much less favourable, they can do quite well.”
However, he tends to prefer investment-grade corporate bonds of a shorter-dated maturity. “We also like global high yield, but we are mindful of the fact that high yield has has a high energy sector component, but within a global portfolio allocation it is somewhat less.”
“We like long-dated UK gilts. They are particularly attractive from a historical basis given how long-term rates are. But against the backdrop of moderate growth, low inflation – and there is no obvious likelihood of central bank rate hikes for some time to come – we think they work well.”
The year ahead
One of the challenges around retail funds, is that market liquidity can “evaporate”, Mr Isaac says, which makes it very difficult to trade, buy or sell. “What happens is the price of the assets is marked down because of liquidity in the markets, bid-offer spreads are widened and the prices of those fall. So investors see a fall in the value. When liquidity is back, they bounce back to where they were.
Investors have to get used to more volatility; the function of the market has been compromised to a certain extent because of the lack of investment banks taking the other side of the market and a general lack of liquidity in assets.
“The low volatility nature of fixed income is something we are not likely to see until we start seeing more normalised monetary policies and the return of risk-taking from investment banks,” he adds.
