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In an exclusive interview with IFA Magazine, Legal & General Investment Management‘s (LGIM) Matthew Rees and Colin Reedie talked with Brandon Russell about how and why they believe their investment approach in managing the L&G Strategic Bond Fund (SBF) means the fund should remain well positioned in today’s challenging fixed income environment.
Our conversation with LGIM’s Matthew Rees, Head of Global Bond Strategies and Colin Reedie, Head of Active Strategies, was intended to discover their views on the current volatile economic backdrop for fixed income investors and whether they believe the SBF’s broad mandate and active investment approach mean that they believe they are well placed to overcome the issues within the market. The SBF invests in a variety of types of bonds and related investments, from UK and overseas issuers, across the risk spectrum. It was launched back in 2007.
Matthew also highlights some of the lessons that have been learned about investing in credit following recent banking sector troubles, and the Thames Water* situation as notable examples.
Both Colin and Matthew perpetuated a consistent message of flexibility of exposure to interest rates as a method of aiming to overcome fast-changing macro-economic conditions. They also highlighted the potential benefit of having teams across the globe which enable them to operate a robust, active approach for the SBE.
The key differentiators of being flexible and having a strong team approach are what Rees and Reedie believe sets their fund apart and gives it a strong foundation when many others in the same held may be faltering.
IFA Magazine: With fixed income yields now at multi-decade highs, do you think it can be argued that they are going to return to the levels we’ve got used to after the global financial crisis?
Colin Reedie: “It depends entirely on what the relevant authorities response is to the next recession; it depends on when it starts, how we go into it, what the catalysts are, how scary it looks etc.”
“The reason why we struggle so much with the ‘shallow recession’ narrative is that when the data starts to roll over globally or in the US, it’s going to be impossible to tell at that time how many quarters will have negative growth, and therefore how shallow or deep any recession is going to be. At that point, normal investor risk-averse behaviours will really reassert themselves there’s so much uncertainty.”
“Our central thesis that we’ve been orbiting around for some time has been that the pandemic was the catalyst for a very big shift away from monetary policy and towards fiscal policy. We’ve seen all the issues that have come with it, in terms of throwing money at the problem in a re-opening scenario where you’ve got supply chain issues and pent-up demand. This has created an inflationary backdrop, the likes of which most market participants haven’t experienced first-hand.”
“That all gets amplified by the Russia and Ukraine conflict and the corresponding spike in energy prices. So, if we’re right and global policymakers are keen to stick with fiscal policy in the face of an economic slowdown, then that is fundamentally more inflationary than just cutting interest rates.”
“If it is fiscal, there’s too much sticky inflation in the system and if you start writing people blank cheques, chances are they’re going to go out there and spend it at some point. This would mean you may well get a shallow recession, but it will come with higher price levels and therefore higher yields. We’d argue therefore that central banks won’t be able to take rates down to the levels that they took them back to before.”
IFA Magazine: What does the recent turmoil in the banking sector, and the Thames water situation, tell us about credit?
Matthew Rees: “These are outputs from the rapid rate increases that we’ve seen globally. They have caused and will continue to cause challenges for the companies or sectors where there are issues around either liquidity or absolute levels of leverage. The important thing about these two situations is that very few, if anyone, actually foresaw the issues would lead to nationalisation rumours in the way that has happened.”
“For us, it’s really important to be laser-focused, supported by our team of credit analysts across the globe, in London, Chicago, Hong Kong and Singapore of course, about bottom-up credit quality and which companies or sectors could face those issues.”
“We also really do rely on the strength of the team that runs the portfolios, whether that be my team covering predominantly investment grade and also subordinated debt or our high yield and our emerging markets teams to have really diversified portfolio.”
“Investment managers won’t get everything right, but we believe if you have really strong levels of diversification, as we aim to do, then it becomes less painful when something doesn’t go as planned.”
Matthew Added: “For our portfolio and for our clients it really emphasises the importance of the rate capability we have. We’re not just relying on credit to produce returns for our clients. We also have a very dynamic approach to taking interest rate exposure and that responds to these economic concerns that we have and the kind of rapid rate environment that we are in.”
“I think it’s that diversity of earning sources that we have within the team which ultimately makes a difference for our clients as well.”
IFA Magazine: What is the importance of the active side of the investment business within LGIM, which has traditionally been seen as a leader in passive approaches?
Colin Reedie: “That’s certainly been LGIM’s reputation over recent years. There has been this concept of active fixed income as part of the business since we began but the passive business has grown significantly since then. In reality, we believe we benefit enormously from having a foot in both camps – both active and passive. Personally, I wouldn’t want to work for an asset manager that was just one or the other”.
“We are certainly working closely with our passive colleagues on new product development and ETF construction to help balance these kinds of issues. However, like all asset managers, we want to improve our active fee, our average fee rate and our margin and you’re really going to do that in the active space where we can charge higher fees. It’s a hugely important part of the company’s broader strategic vision for where we want to get to.”
Matthew Rees: “The other important point is that to really energise a team of analysts, like the one we are so fortunate to have across the globe, it is vitally important with the current economic environment that those analysts are much more energised when they’re facing active fund managers who are taking active risk and they contribute towards that risk profile. Therefore, the positive circularity you get with that is really beneficial”.
Colin Reedie: “Active managers tend to outperform or earn their stripes at cycle-turning points at major junctures in the cycle. If we’re right about that original investment thesis, we feel that we will be entering into a more volatile economic cycle and a more volatile environment. This should suit the active discipline more than it maybe has done over the last 20 years of QE, policy manipulation and interference in markets to support them where there has been a lot of beta relative to alpha. If the underlying background is much more fragile and challenging, that should lend itself to the active investment philosophy, maybe more so than passive. We feel confident that our approach is flexible and robust enough to seek to capitalise on the opportunities which present.”
Throughout the discussion both Matthew and Colin highlighted that while there are currently many challenges facing them as investment managers, they remain focused on having robust strategies in place to navigate market dynamics.
The overarching message from both Colin and Matthew was that the most important thing they believe is to not stand still in the face of high interest rates and volatile economic conditions.
For some investors refusing to act within the fixed income opportunity set could lead to significantly poorer returns, in their view. Therefore, they argue that maintaining an active approach to the fund is the only way to seek better results for investors and their clients.
LGIM’s particularly strong resource of having teams located across the globe as well as a selection of enthused active managers, means that they feel confident that their fund has the best possible opportunity to be flexible, to capitalise on opportunities as they present and therefore to continue to seek to deliver for investors over the long term.
*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.
About Colin Reedie
As Head of Active Strategies ot LGIM. Colin is responsible for the London-based Global fixed Income team and members of LGIM’s Active Equities team. He also has overall portfolio management responsibilities for LGIM’s Global Credit and Absolute Return Bond strategies.
Colin joined LGIM in 2005 from Henderson Global Investors where he was Head of Investment Grade Credit Fund Management. He has over 30 years’ experience in bond markets, specialising in non-government debt, and he has previously worked for Henderson Global Investors, Scottish Widows and Scottish Amicable.
About Matthew Rees
Matthew was appointed as LGIM’s Head of Global Bond Strategies in September 2019. Prior to this he was co-head of the Euro credit portfolio management team. He joined LGIM in March 2009.
Prior to this Matthew spent three years as a Partner at Banquo Credit Management (a multi-billion euro absolute return investment manager) and has worked at UBS, Merrill Lynch and the rating agency Fitch IBCA. Matthew has more than 25 years’ experience in financial services and qualified as a chartered accountant with Coopers & Lybrand in 1996.