Historically low yields are denting investor demand for sovereign bonds, but some global bond managers are managing to swim against that tide.
Only the best managers in areas such as "macroeconomics, rates and FX," running global — including emerging markets — bond strategies are benefiting in the current environment, said Kate Hollis, a London-based senior investment consultant with Willis Towers Watson PLC, focused on fixed-income manager research.
If the ability to garner inflows is the test of whether a manager belongs to that fraternity, then Colchester Global Investors Ltd., a London-based investment boutique strictly focused on sovereign bonds, is in.
Colchester's numbers show net inflows of $2.6 billion over the first 10 months of the year which, together with valuation gains, have lifted the firm's global assets under management to $39.3 billion — a 16% boost from $33.9 billion at the close of 2016.
Asset owners based in the Asia-Pacific region have stood out this year, accounting for $2.8 billion of net inflows which have more than offset modest outflows elsewhere. Asset owners in Japan, moving out of zero-yielding domestic government bonds, and Australia, where investors are seeking managers with expertise, such as currency management, central to Colchester's offering, have powered those inflows said Paul Allen, managing director and head of marketing and client services for Colchester in Europe, Africa and Asia-Pacific.
With the current year's tally, the Asia-Pacific region now accounts for 30% of Colchester's $39.3 billion in global AUM, up from 18% of $31.7 billion at the close of 2014, according to company materials.
The firm — with its target of delivering returns over a market cycle 2 percentage points in excess of the Citi World Global Bond Index — has been able to appeal to asset owners seeking yield, but also to investors counting on sovereign bonds, even at current yields, to cushion portfolio losses in a risk-off environment.
The "huge fall in yields" under quantitative easing has led institutional investors to reduce their exposure to government bonds, but they still see bonds "as a good diversifier to equities and other risk assets," said James Mitchell, a London-based senior portfolio manager, global fixed income, with Russell Investments.
Investors getting out of "expensive" sovereign bonds in recent years only to see those bonds become more expensive, as yield continued to drop, lost out on "extremely attractive" returns, noted Mr. Allen.