PI Partnership – Jupiter Asset Management
THE CASE FOR ‘ABSOLUTE RETURN’ IN AN ERA OF GROWTH AND INFLATION
Mark Nash is head of strategy for fixed income alternatives at Jupiter Asset Management
Mark Nash explains the merits of an ‘absolute return’ approach to fixed income, as higher growth and inflation impact fixed income returns.
The post financial crisis era was marked by low growth and low inflation, due to errors by policymakers. The dominance of central banks in that environment proved supportive for finan- cial assets. In that falling yield and low volatility world, eco- nomic outcomes were poor as central bank liquidity flowed directly into financial assets.
As the global economy recovers from the pandemic, the policy- making landscape has dramatically changed. Fiscal spending is unlikely to disappear anytime soon as inequality and global warming issues are addressed. Central banks are unwinding support and will take more of a backseat, while ensuring that banking systems are in good health to support the recovery. This reflationary environment will be better for the global economy and worse for fixed income. Higher growth and infla- tion will see yields rise and so a more absolute return approach will be needed to achieve positive returns in the fixed income space. Strategies with the ability to take short positions either outright or for relative value investments will be required and the flexibility to invest across the fixed income universe to find returns is essential. Absolute return strategies typically seek to achieve positive returns in all market environments. They have no benchmark and so should be measured by manager skill through their level of risk-adjusted returns. This incorporates the amount of return achieved relative to the amount of risk used to achieve it. Their purpose is to manage the cycle for investors and to smooth returns as the cycle progresses, outperforming in a bear market although they will often underperform in a bull market. Methods of downside protection are often incorporated to achieve this key goal. They tend to have high flexibility and make the most use of diversification avoiding pure directional market plays to achieve a low correlation to the broader mar- kets. They are often unconstrained and have a full derivative usage to achieve this. Absolute return strategies typically use top-down fundamental research to identify the macro-economic environment to
24 April 2022 portfolio institutional roundtable: Fixed Income
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