Q1. The fixed income universe has grown and evolved over time. What do you think are some of the more interesting instruments and why would these be advantageous in the current environment for a relatively low risk fixed income fund?
Inflation linked bonds (ILBs) are currently piquing our interest. In the past we have advocated a preference for nominal bonds over ILBs, largely because of the inherent inflation risk premia embedded in a nominal bond. Significant underperformance versus the fixed rate government bonds, means ILB’s present value in the form of attractive real returns (approximately 4.5%), with limited downside on a relative basis. At current pricing levels, investors should be able to earn similar returns to the fixed rate bonds, whilst hedging inflation. The inflation risk premia has significantly compressed, offering cheap insurance.
Q2. The macro-economic environment has been uncertain and markets volatile over recent months. Following a protracted cycle of high short rates, where do you see opportunity going forward in the fixed income market?
The current macro-economic environment broadly favours investing into fixed income instruments. Inflation, which has been rising for a long period, is the biggest erosion of value for this asset class. In most regions we are now experiencing falling inflation rates, implying strong real returns on fixed income instruments on a forward-looking basis. Global growth also appears to be slowing down, dampening return expectations for equities, and narrowing prospective returns versus fixed income.
Furthermore, the next interest rate move for many policymakers is down, with the US Fed expected to announce the start of a rate cutting cycle in September 2024, allowing the rest of the world to follow, without fear of devaluing their currencies. Changes in yield curves are approximately 90% explained by expectations of short-term interest rates. Thus, a declining interest rate environment would more likely than not, result in lower yields across the curve, further advancing the price of bonds.
Q3. Fixed income investments form a critical role in a balanced fund given the low correlation to other asset classes such as equity. Have you seen the role of fixed income shifting over the last year and would you say there have been fundamental changes that shift how portfolio managers would allocate to fixed income going forward?
The recent rate hiking cycle has driven concerns about generalising correlations and the diversification benefits of different asset classes. It’s important to understand the environment, and not fall into the trap of static assumptions based on history. Over the last year, the role of fixed income investments has shifted from more of a diversification play globally, to one which now also includes a return play. Investors are afforded attractive real yields in hard currencies, which have not been prevalent for over a decade. Fundamentally, we’re past the stage of artificially low interest rates.
Q4. Truffle has a strong track record in managing the award-winning Truffle SCI* Income Plus fund. You have recently launched a multi-asset income fund. Can you provide a brief outline of how this fund will be managed and what makes it different?
The fixed income component of the Truffle SCI* Enhanced Income fund is managed in line with other fixed income mandates as we aim to build from a robust and proven investment strategy. We have the flexibility to enhance return on the multi-asset income mandates through increasing duration and adding exposure to risk assets such as equities, property and preference shares. While this does add some risk and volatility, we select assets carefully. Truffle’s open and dynamic team-based approach means we leverage the success of the broader investment team in selecting stocks and property. We focus on choosing assets with strong cashflow, and high dividend yields. Our aim is to manage this fund to deliver an enhanced income return with an added focus on growing capital.
