By Daniel Pechon.
The prospect of rate cuts by the Fed is sparking a new debate. In principle, bonds are considered a safer investment than equities, while Wall Street continues to pile up record after record. For these reasons, investing in bonds could now offer better opportunities than equities, with almost 70% of central banks having adopted an accommodating policy.
Given the alitude of the indices and valuations well above historical averages (mainly in the US), starting to put a little money into less volatile and less risky vehicles seems to be an increasingly good idea in the minds of many bond managers. In short, bonds could now offer better opportunities than equities.
Moreover, after two years of outflows in 2022 and 2023, the success of active management in bond funds is undeniable. According to Morningstar's figures, active bond management is becoming increasingly popular, with a fifth consecutive quarter of positive inflows at the end of June. This is a sign that investors are increasingly demanding and convinced of the benefits of active management in a highly volatile interest rate environment and markets that are less correlated than in the past.
Changing times
Historically, the Fed was the queen of central banks and set the pace in the interest rate market. But this time, the ECB began its rate-cutting cycle well before and independently of the Fed's... and will practically complete it when the Fed only begins its own. Another example of the need for greater agility in bond management today is the latest upheaval in yields on French debt. And France's sovereign rating has just been downgraded by an agency (from AA- to A+ by Fitch). Just a few days later, Italian debt was upgraded by the same agency (from BBB to BBB+ by Fitch) on the back of increased confidence in the country's budgetary path and the policies of the Italian government. Unheard of...
The bond market is caught up in a whirlwind. At a time when the Fed is resuming a cycle of rate cuts, when the dollar is approaching 1.20 against the euro, its highest level for four years, when Trump is threatening the Fed's two mandates (full employment and inflation) and imposing Steph Miran, the man who wants to put the Fed at Trump's service, when the impact of tariffs is uncertain, when the ECB is opting for the status quo, and when China, in the throes of anxiety, is still stuck in a long tunnel of deflation, "Fiscal worries remain, economic data remain fragile, yet equity markets are leaping from record to record and gold is hitting new highs. The Fed is going to cut rates, but the recession still seems a long way off," says the DNCA Alpha Bonds management team.
More than 5% per year
Against this backdrop of a hybrid market, DNCA Invest Alpha Bonds continues to perform convincingly, with a counter reading of 4.13% at 20 September, well on the way to outperforming 2024 with 3.63% in 12 months, and approaching its three-year annualised performance of 5.16% (the annualised performance of funds in the Alpha Bonds category is just over 4% on this criterion).
Investors were not mistaken, as they voted in favour of the DNCA Alpha Bonds fund, whose success has been undeniable in recent quarters. Between1 January and 18 September, DNCA's bond fund took in exactly 5,484,769,159.87 euros in new money (total new money at DNCA on the same date, 6,351,301,908.13 euros). What's more, with more than three months to go before the end of the year, Alpha Bonds has just exceeded its fundraising figure for 2024, €5,367,455,289.48. ETFs, the fast-growing low-cost exchange-traded funds, are becoming increasingly popular for equity investments, but less so for bond investments, as they are considered too static in the face of market volatility, which is the key to performance.
DNCA Alpha Bonds' bond management is multi-strategy, flexible and international, with active volatility management by the manager. It's no longer a case of choosing the best bonds and sitting on them until maturity, with a few arbitrages from time to time. Pascal Gilbert and François Collet's management team has free rein to seek yield anywhere in the fixed-income market, at any time.
Another source of income for the fund is the buy and sell (short) strategy, which makes intelligent use of interest rate expectations as well as market inflation. The same goes for exploiting the yield curve. Indeed, managers may find it wise to exploit the differences between long-term and short-term rates. Thanks to this flexibility, the team can build buy/sell strategies on the same (or different) yield curves and navigate through a difficult environment with less risk.
The dollar and the Swiss franc
However, you also need to know how to manage the different currencies. The euro/dollar exchange rate has slid by more than 12% since1 January alone. For a dollar-based investor, it's a party, but for a euro-based investor who has touched dollar-denominated assets, it's more of a grimace.
"Following the rally in short rates in recent weeks, the first half of September saw a flattening of the yield curves in developed countries, particularly Japan and the UK. Given current market conditions, we have maintained the portfolio's sensitivity at around 6. The yield is 3.73%. Mainly, we remain long on the inflation troughs, EM sovereign bonds (emerging markets) in hard currencies (EUR, USD), the steepening of the European and US curves and the flattening of the Japanese and Australian curves," said the managers in mid-September.
In currencies, alongside the traditional euros and dollars, the Hungarian forint, the Australian dollar, the Brazilian real and sterling are leading the way, with percentages of no more than 5%, in the various currency exposures in mid-September. It should be noted that the fund maintains a negative (debit) position in Swiss francs, whose central bank rates...are zero percent.
Another of the fund's qualities is that it is better at cushioning downturns when markets are gloomy. Based on performance statistics for the last five years, the fund ranks in the top decile.
A fund that dares to look down on the passive investor of trackers or ETFs.
