Meet the fund managers: Euro bond hunting with conviction
In this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from Neil Mehta, manager of the RBC BlueBay Investment Grade Euro Aggregate Bond Fund.
How does your fund stand out from others in the same market?
We embrace a truly active mindset unlike many of our benchmark-hugging peers. We are not afraid of backing our investment convictions in size. For example, leveraging Euribor futures to express rates view in the eurozone, or utilising BTP futures to execute a spread trade on Italian sovereign risk. Of course, a prudent risk framework goes hand in hand with our strong focus on alpha generation.
Which of your holdings are you most excited about?
We particularly like Romania and Mexico, both IG-rated with relatively low debt-to-GDP ratios. Both offer yields more than five per cent, a full two per cent over France for example. Our team visited Romania late last year and the feedback was generally positive on the political front, albeit risks on the fiscal consolidation side. However, strong support from the EU and the attractive valuation tilts the risk-reward in favour of a core holding.
On the rates side, our views are largely shaped by how we view macro in a post-pandemic world – stickier inflation, large fiscal deficits, rising populism, de-globalisation, and geopolitical uncertainty. This will likely keep long-term yields elevated in the foreseeable future, and limit how much central banks loosen monetary policy.
In that respect, we are still excited about curve ‘steepeners’ (buy short maturity bonds/sell long maturity bonds) as central banks adjust interest rates late as we move into the latter stages of the cycle.
What is the biggest mistake you’ve ever made in the fund?
Making mistakes or being incorrect is part and parcel of being a risk-taker. In fact, having a mindset that focuses the downside risks associated with your trades keeps you more alert and ready to act if necessary.
As for the ‘biggest mistake’, it’s probably not foreseeing the cascading impact of lockdowns in early 2020. Despite having a robust risk management framework in place, extreme market scenarios can place unprecedented pressure on portfolio construction.
In our case, we suffered a large drawdown that March as liquidity dried up and we were left holding risky positions like Greek government bonds and the Norwegian krone (versus the euro).
By mid-March, we were confident a policy response was in the offing from the ECB (they did so by enacting the Pandemic Emergency Purchase Programme), but our mark-to-market losses and risk controls meant we were unable to increase the positions the way we wanted. We ended the year outperforming the benchmark, but it could have been much better if not for the missed opportunity.
What’s one change you made in the fund recently? Why didn’t you make it sooner?
We went underweight French government bonds earlier this year as the debt metrics just didn’t stack up when we did our proprietary analysis. We were unsure on the exact timing but were confident at some point later in 2024, the market, the EU and rating agencies were going to start putting more pressure on France to consolidate its finances. As it happened, the EU elections proved to be the trigger for a subsequent snap election and the catalyst for market reaction.
While we had the right trade on, in hindsight, our timing was too early, and the size of the position wasn’t nearly as aggressive enough to have a material impact on fund performance. It was a lesson that despite making the right call, other important factors such as timing and position size are just as important ingredients in a successful trade.
What’s the biggest change you’ve seen in the industry since you started?
I would highlight three aspects. Firstly, market volatility episodes are much shorter in duration, limiting the window of opportunity to take advantage of large market movements.
This is most likely due to the continued rise of often unsophisticated data-driven strategies and retail investing, but also the difficulty in interpreting economic data in a post-pandemic setting. As an investor, there is less room for complacency and portfolio construction is important as you want to be pre-positioned into risk events.
Secondly, it has become more difficult to separate signal from noise from an information standpoint. We live in a world where even mobile phones are constantly pinging you the latest news stories, tweets and messages and this information overload can ultimately be detrimental to your investment thesis if you follow the wrong information.
Finally, macro in the broadest sense, combining top-down structural economic shifts, a higher inflationary environment with bottom-up micro-analysis of countries, regions and geopolitics is much more volatile and moving force than say ten years ago. This opens more opportunities on the long and short side of investing or being overweight /underweight in reference to benchmark strategies.