"Bond markets have enjoyed strong performance": Q&A with Charlie Jamieson, CIO of Jamieson Coote Bonds April 2019

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Industry Moves last caught up with Charlie Jamieson, CIO of Jamieson Coote Bonds, 12 months ago to discuss starting up the active bond fund manager in 2016. A year later and JCB has added an active international bond fund to the mix. He talks to Industry Moves about the outlook for bond markets and what he believes will be the "next big thing" for credit.

It’s been a year since we spoke last, and you’ve since launched a new global bond fund, what was the impetus behind that launch?

The global fund launch delivers our clients a true “defend and is a protect” extension of the domestic high grade bond strategy. By offering a global solution, clients can achieve diversification for their fixed income and extend the opportunity set across G7 nations. This offering also allows for the addition of currency risk, which we feel can add to the defensive characteristics of the allocation.

How have global bond markets performed over the past 12 months?

Bond markets have experienced a round trip thanks to the US Federal Reserve, which raised interest rates four times in 2018. This has tightened economies and lifted the cost of global capital. Macro market economic data has slowed significantly as a result and bond markets have enjoyed strong performance over the last six months, which looks set to continue, in our opinion, as we approach the end of the business cycle.

What do you think will be the main challenges for bonds in the next 12 months?

Timing. As is often the case in markets, the themes of the markets are quite straightforward (slowing data, too much private debt) but getting the timing correct is difficult. In the next 12 months we expect the RBA will be cutting interest rates to support the Australian economy and property market. August looks the most likely window after the federal election. We also expect the US Federal Reserve will be cutting rates by early 2020.

"In the next 12 months we expect the RBA will be cutting interest rates to support the Australian economy and property market."

Would you also call the investing strategy for this fund “plain vanilla”?

Yes. The fund is a long only bond fund without leverage. It utilises interest rate futures contracts, which are all exchange traded to control interest rate and currency risk. All assets are government guaranteed or issued by a government-type agency.

How do you work out the different country weightings? Is it just in accordance with the benchmark?

The benchmark is always the reference point, but as an active manager we look for opportunities to outperform that benchmark for the benefit of our investors. Weightings are set after significant work in our investment process and are sized according to the conviction of the team combined with quantitative data.

When we spoke last we talked about the lack of exposure retail investors have to bonds - do you think this has changed at all in the past 12 months?

Yes. Australian government bonds were the best performing asset class in the country last year and this has lifted the profile of the offering, as the portfolio benefits are evident. When investors consider the risk-adjusted return, government bonds make for a compelling allocation for capital preservation and a strong expected return profile in a late cycle environment.

"Australian government bonds were the best performing asset class in the country last year and this has lifted the profile of the offering, as the portfolio benefits are evident."

What do you think will be the ‘next big thing’ in bond markets?

A credit event in corporate credit. US consumer loan delinquencies are rising quickly from a 50-year low. That’s a big boat to slow down and it’s full steam ahead to a problem soon. Again the timing is hard, but all the precursors are in place after the Fed raised rates aggressively over 2017 and 2018. This takes time. Think to the last big cycle in the GFC. It was two years after the Fed stopped raising rates in 2006 that we had the Big Bang of mid 2008.

What do you do when you’re not investing in bonds?

Try and keep up with three young kids and a new dog. Work takes me away from my family more than I’d like during the week, so I love spending time with the kids and catching up with old friends come the weekends.

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