A few weeks ago, I put forward the idea of how important active management is in today’s volatility. Indeed, as many market participants believed that we were heading to the 3 per cent psychological breach in the 10-year US Treasury, many feared volatility.

Here you go. This level was breached this week, volatility re-appeared, the dollar strengthened, equities sold off and the fixed-income asset class followed suit. The fear going forward is a heightened volatility period which, to many fixed-income managers, including us, might be a blessing in disguise. In this regard, I once again reiterate the importance of active management in order to pick up value.

Many think we are going nuts, but for fixed-income managers who believed in an upcoming volatile period and held over 10 per cent cash levels in their portfolios, this might be their winning ticket for the second quarter of 2018.

Over the past months, the very tight spreads across the rating spectrum were in my view ridiculous. Risk-adjusted metrics were literally being ignored, with investors taking very risky positions. This is truly the case when CCC rated issues were performing better than BB and single B credit. Indeed the recent tighter spreads were not justifying fundamentals.

This comes to no surprise; a sell-off should send a strong message to investors that fundamentals do really matter. When investors base their trade ideas on a bottom-up approach, fundamentals can be thoroughly analysed and relative value can be identified. In simple terms, strong credit names which are also negatively impacted by market volatility may offer investors very attractive entry points to generate what we call in investment jargon alpha - a metric which measures the outperformance of a fund over a comparable benchmark.

It is easy to make money when markets are rising, as experienced over the past years, mainly 2012/13. However, what differentiates active from passive management is the ability of the active manager to identify value trade opportunities in turbulent markets. Despite the recent volatility we do not expect a sustained bond market sell-off, so as I have pointed out earlier, the current volatility does indeed offer niche venues for investors.

Theoretically, yields of government bonds will gradually rise as monetary politicians opt for tighter policies in line with global economic improvements. That said, apart from the fact that yields will not rise in a straight line, corporate bonds will likely still be supportive given the improved macro environment.

Following the current volatility, investors might be more convinced that fundamentals do really matter, and in this regard strong credit cases should see tighter levels following widening spreads due to market volatility.

It is important to remember that the bond market is not a single entity operating in a vacuum. In this regard, the dissection of the asset class per se and the regions are key to look out for, in order to generate alpha. Thus, the retention of a flexible and global approach will ensure that active managers can take advantage of the opportunities across the fixed income universe when volatility strikes. Once again I reiterate, there will always be value in the bond market.

Disclaimer:

This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.