How to Manage Bond Market Pain and Seek the Gain When Rates Are Rising
Written by: Nick Gartside, International CIO of Global Fixed Income, J.P. Morgan Asset Management
The realities for fixed income investors have changed. How is this being reflected in markets?
Bond investing has become increasingly difficult over the past decade. Markets have been heavily distorted by ultra-low interest rates and quantitative easing, as well as by extreme risk aversion in response to the global economic crisis and the eurozone debt crisis. With bond yields still at historically low levels, investors can no longer rely on coupons for the majority of their fixed income returns. Instead, managers are increasingly challenged to generate capital gains by employing the full fixed income tool kit.
More recently, bond markets have been hit by a major shift in outlook for growth and inflation following the US elections. Yields have risen and credit spreads have narrowed in reaction to President Trump’s fiscal stimulus plans, which are expected to spur the Federal Reserve to normalize interest rates faster than was initially expected. This drastic change in outlook should lead to increased volatility as the market grapples with the new bond regime.
In this environment, how can investors generate attractive fixed income returns while managing volatility?
Quite simply, at a time when growth and inflation forecasts are rising, investors need to have every tool at their disposal to generate fixed income returns while managing risk. This means being mindful of the rigidities of fixed income benchmarks and considering an unconstrained approach so that opportunities can be exploited across the broadest possible investment universe.
Traditional fixed income benchmarks have some inherent weaknesses. They tend to reward bad behavior, and they no longer provide a sufficient cushion against rising rates. Most fixed income benchmarks – such as the Bloomberg Barclays Global Aggregate Bond Index – are market cap-weighted, so investing with reference to a traditional bond index may mean having most of your exposure to those countries or companies that have issued the most debt, and are therefore perhaps the least creditworthy. Additionally, many issuers have taken advantage of the low yield environment to extend the duration of their debt, eroding the yield cushion provided by benchmarks and exposing investors to potential capital losses when interest rates rise.
In contrast, unconstrained fixed income investors have the potential to allocate dynamically across all fixed income sectors, thereby positioning portfolios optimally as the economic environment changes. They can also quickly shift geographical exposure in order to sidestep political risks and—perhaps most crucially given today’s reflationary environment—they can manage duration flexibly to adjust the sensitivity of portfolios to changes in interest rates.
What characteristics should investors look for when selecting an unconstrained fixed income manager?
Finding the best opportunities in the $100 trillion global bond market requires a large global resource to generate ideas. However, it’s not enough just to have lots of boots on the ground. A successful unconstrained manager needs to be able to ensure that the best ideas from investors around the world are shared and compared on a consistent basis—and that these ideas are packaged into portfolios in a risk-controlled way.
At J.P. Morgan Asset Management, we use the same fundamental, quantitative and technical screens for all the bonds and sectors we cover globally. This framework provides a consistent language for assessing relative value opportunities. We also take a multi-dimensional approach to risk, ensuring portfolios are well diversified, while also keeping a close eye on the sensitivity or correlation of portfolios to several risk factors, including changes in market interest rates, changes in exchange rates and changes in credit spreads.
Where are you currently finding the most attractive opportunities, and where are you looking to reduce portfolio risk?
We believe stronger economic growth and rising interest rates will support demand for spread products—therefore we are finding most value at the moment in US high yield bonds, investment grade corporate bonds, convertible bonds, commercial mortgage-backed securities and, more selectively, in emerging market debt.
With interest rates likely to rise faster than anticipated, we also continue to be cautious on duration exposure. We think the Federal Reserve will raise interest rates three more times in 2017, helping push the 10-year US Treasury up from the current 2.3%-2.5% level towards 3.0%-3.5% by the end of the year.
In this environment, capitalizing on the opportunities and managing the risks as they arise requires the expertise and flexibility that an experienced unconstrained fixed income manager can provide.
Broaden the borders of your bond portfolio
To access the opportunities in global bond markets, investors may benefit from a fund with the flexibility to invest across the entire fixed income spectrum. Both the JPMorgan Global Bond Opportunities Fund and ETF dynamically allocate to the highest conviction ideas of its management team across 15 sectors and more than 50 countries.
Learn more about the JPMorgan Global Bond Opportunities ETF (JPGB) here
Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.
Rosie the Robot, Amazon, and the Future of RAAI
Written by: Travis Briggs, CEO at ROBO Global US
It’s tough to find a kid out there who hasn’t dreamed about robots. Long before artificial intelligence existed in the real world, the idea of a non-human entity that could act and think like a human has been rooted in our imaginations. According to Greek legends, Cadmus turned dragon teeth into soldiers, Hephaestus fabricated tables that could “walk” on their own three legs, and Talos, perhaps the original “Tin Man,” defended Crete. Of course, in our own times, modern storytellers have added hundreds of new examples to the mix. Many of us grew up watching Rosie the Robot on The Jetsons. As we got older, the stories got more sophisticated. “Hal” in 2001: A Space Odyssey was soon followed by R2-D2 and C-3PO in the original Star Wars trilogy. RoboCop, Interstellar, and Ex Machina are just a few of the recent additions to the list.
Maybe it’s because these stories are such a part of our culture that few people realize just how far robotics has advanced today—and that artificial intelligence is anything but a futuristic fantasy. Ask anyone outside the industry how modern-day robots and artificial intelligence (AI) are used in the real world, and the answers are usually pretty generic. Surgical robots. Self-driving cars. Amazon’s Alexa. What remains a mystery to most is the immense and fast-growing role the combination of robotics automation and artificial intelligence, or RAAI (pronounced “ray”), plays in nearly every aspect of our everyday lives.
Today, shopping online is something most of us take for granted, and yet eCommerce is still in its relative infancy. Despite double-digit growth in the past four years, only 8% of total retail spending is currently done online. That number is growing every day. Business headlines in July announced that Amazon was on a hiring spree to add another 50K fulfillment employees to its already massive workforce. While that certainly reflects the shift from brick-and-mortar to web-based retail, it doesn’t even begin to tell the story of what this growth means for the technology and application firms that deliver the RAAI tools required to support the momentum of eCommerce. In 2017, only 5% of the warehouses that fuel eCommerce are even partially automated. This means that to keep up with demand, the application of RAAI will have to accelerate—and fast. In fact, RAAI is a key driver of success for top e-retailers like Amazon, Apple, and Wal-Mart as they strive to meet the explosion in online sales.
From an investor’s perspective, this fast-growing demand for robotics, automation and artificial intelligence is a promising opportunity—especially in logistics automation that includes the tools and technologies that drive efficiencies across complex retail supply chains. Considering the fact that four of the top ten supply chain automation players were acquired in the past three years, it’s clear that the industry is transforming rapidly. Amazon’s introduction of Prime delivery (which itself requires incredibly sophisticated logistics operations) was only made possible by its 2012 acquisition of Kiva Systems, the pioneer of autonomous mobile robots for warehouses and supply chains. Amazon recently upped the ante yet again with its recent acquisition of Whole Foods Market, which not only adds 450 warehouses to its immense logistics network, but is also expected to be a game-changer for the online grocery retail industry.
Clearly Amazon isn’t the only major driver of innovation in logistics automation. It’s just the largest, at least for the moment. It’s no wonder that many RAAI companies have outperformed the S&P500 in the past three years. And while some investors have worried that the RAAI movement is at risk of creating its own tech bubble, the growth of eCommerce is showing no signs of reaching a peak. In fact, if the online retail industry comes even close to achieving the growth predicted—of doubling to an amazing $4 trillion by 2020—it’s likely that logistics automation is still in the early stages of adoption. For best-of-breed players in every area of logistics automation, from equipment, software, and services to supply chain automation technology providers, the potential for growth is tremendous.
How can investors take advantage of the growth in robotics, automation, and artificial intelligence?
One simple way to track the performance of these markets is through the ROBO Global Robotics & Automation Index. The logistics subsector currently accounts for around 9% of the index and is the best performing subsector since its inception. The index includes leading players in every area of RAAI, including material handling systems, automated storage and retrieval systems, enterprise asset intelligence, and supply chain management software across a wide range of geographies and market capitalizations. Our index is research based and we apply quality filters to identify the best high growth companies that enable this infrastructure and technology that is driving the revolution in the retail and distribution world.
When I was a kid, I may have dreamed of having a Rosie the Robot of my own to help do my chores, but I certainly had no idea how her 21st century successors would revolutionize how we shop, where we shop, and even how we receive what we buy - often via delivery to our doorstep on the very same day. Of course, the use of RAAI is by no means limited to eCommerce. It’s driving transformative change in nearly every industry. But when it comes to enabling the logistics automation required to support a level of growth rarely seen in any industry, RAAI has a lot of legs to stand on—even if those “legs” are anything but human.
To learn more, download A Look Into Logistics Automation, our July 2017 whitepaper on the evolution and opportunity of logistics automation.
The ROBO Global® Robotics and Automation Index and the ROBO Global® Robotics and Automation UCITS Index (the “Indices”) are the property of ROBO who have contracted with Solactive AG to calculate and maintain the Indices. Past performance of an index is not a guarantee of future results. It is not intended that anything stated above should be construed as an offer or invitation to buy or sell any investment in any Investment Fund or other investment vehicle referred to in this website, or for potential investors to engage in any investment activity.
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