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High bond-market returns of past 30 years an ‘anomaly’, says Schroders US boss

Investors should not regard the handsome total returns from the bond market seen over the past three decades as normal, according to the CEO of Schroders' US operations.

Karl Dasher, who is in Bermuda this week for talks with clients of the London-based investment house, said in an interview that investors would need to be more selective in the fixed-income markets to gain decent returns.

And he highlighted US municipal bonds as a sector that was currently undervalued.

Mr Dasher, along with Schroders insurance asset management client director Charles Matterson, were meeting with clients including the asset managers of captive insurers on the Island last week. Last Thursday, Schroders staged its fifth annual Bermuda Investment Conference at Wellesley House in Hamilton.

Schroders, whose headquarters are in London, services its Bermuda clients through its New York operation. Globally it has some $415 billion in assets under management, of which around $85 billion is in fixed income.

Fixed-income investors are watching the US Federal Reserve closely right now for any scaling back of their $85 billion bond-buying programme and a subsequent rise in interest rates. As rates go up, the value of bonds falls. Hence, large-scale fixed-income investors — including Bermuda's property and catastrophe reinsurers — have reason to feel a little nervous about the potential impact of an interest-rate spike on their balance sheets.

That was one of the key topics discussed by the Schroders representatives with insurers last week, as well as the potential impact on balance sheets of Solvency II, new European Union insurance regulations that add to capital requirements.

“The current interest rate environment is abnormal in some ways,” Mr Dasher told The Royal Gazette. “People who are benchmarking their expectations to the last 30 years are making an error.

“If you look back across the last 150 years or so, the last 30 years was an anomaly in terms of real returns in the bond markets.”

Returns were now a little above the rate of inflation, he said, rather than the “excessive” returns that were being achieved previously.

Instead of buying aggregate products that track broad indices, Mr Dasher recommended a more selective approach that aligned investments with investor goals.

There are some pockets with great potential for outperforming the market, one of which is US municipal bonds, according to Mr Mr Dasher.

“I tell people that one of the best ways to make money is guilt by association,” Mr Dasher said. As an example, he talked about the impact of the BP Gulf of Mexico oil spill, which impacted share values not only of the energy giant and related contractors who were directly involved, but the whole sector, creating a market dislocation. He said a similar scenario had unfolded in today's muni bond market.

“The biggest dislocation we see in the fixed-income market today is in municipal bonds,” Mr Dasher said. “Because of what's happened with Detroit and Puerto Rico, we're seeing a short-term dislocation that's not justified by the fundamentals.”

Investors should still tread carefully, he warned, adding that there were more than 10,000 municipal securities available in the US, linked to hospitals, toll roads and the liabilities of states and counties.

He gave the Pennsylvania turnpike bond as an example of a strong bond with reliable cash flows going straight to bondholders. A bond tied to the general liabilities of a county, for example, would not be seen as so reliable.

Schroders offers a range of fixed-income funds that seek to meet the varying objectives and risk appetites of clients. They include international bond, credit and high-yield funds; US corporate, high-yield, short- and long-duration and core value funds, as well as domestic tax-exempt funds, including the Municipal Bond Strategy Fund.

In April this year, Schroders increased its share of the fixed-income investment market by more than $10 billion of assets under management through the acquisition of STW Fixed Income Management.

Schroders US CEO Karl Dasher

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Published November 18, 2013 at 8:00 am (Updated November 17, 2013 at 5:42 pm)

High bond-market returns of past 30 years an ‘anomaly’, says Schroders US boss

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