JP’s Journal: Debating the Debates

Fixed Income

Let’s not beat ourselves up too much. Last week, in the UK leaders’ debate, a question was asked by an audience member whether the two main candidates were the best we had.


Actually, despite the campaign miss-steps, the Prime Minister has come across well in the debates and Mr Starmer has confirmed himself as a strong and competent contender. Contrast this with the US debate which was a tough watch. The President that looked frail, lost his train of thought and failed to land metaphorical punches on a candidate whose respect for judicial processes is questionable. In contrast, Mr Trump looked the part but refused to say whether he would respect the outcome of the election; incredible really. The debate ended with a surreal by exchange on who was the better golfer. We live in strange times.


Does this matter? We tend to exaggerate the importance of politicians from an economic perspective. As long as they do no harm, it is down to the entrepreneurial spirit of a country to drive long-term growth. This is why, despite times of political paralysis, the US has knocked the spots off Europe. But there is more than just economics to consider and leadership does matter, particularly in relation to the US. The US President, like it or not, is the de facto leader of the Western world. As it stands, I think it is unlikely that President Biden can now be re-elected. This leaves three potential outcomes. The Democrats choose a new candidate, a third party emerges or Mr Trump is elected. The third outcome now looks most likely in my view. 


Meanwhile in France, the first round of elections saw the populist National Rally (Rassemblement National, or RN) party record 34% of the vote; a strong showing, but below expectations. French assets have been under pressure since President Macron called the snap election and a small relief rally may now be on the cards. But the actual outcome is still uncertain and will depend on how successfully other parties coalesce around anti-RN candidates and how voters react to these choices. The RN is usually described as ‘far right’, but its economic policies are the anthesis of free markets, a usual characterisation of economic thought on the right. In the changing landscape we need new definitions.  


An article caught my attention last week. According to research from the University of Reading, exam answers generated by AI are difficult to spot – even by experienced markers. So, I set my own exam question: Can active government bond managers outperform passive strategies? It is a question that advisers and investors seem to have decided in favour of the passives. The AI answer, not surprisingly, was that “it depends” – with the response highlighting various factors including the market segment, the time period, the benchmark, the risk adjustment, the sources of alpha, and the costs and risks involved. The bland conclusion was that investors should weigh the pros and cons of each strategy according to their objectives, preferences, and expectations, and an evaluation of the track record, skill, and style of the fund managers they choose. Thanks, a pass mark from me but not a gold star.


Craig Inches and his Rates & Cash team have consistently challenged the ‘passive’ assumption in relation to government bonds. In the last few months our message seems to be resonating and it is not surprising. The team’s record is of long-term outperformance delivered with low tracking error, giving rise to some of the highest information ratios throughout our fixed income range. From a cost perspective I think we are competitive and score well against the performance achieved by our peers. Indeed, we position ourselves against those high-profile active strategies which take large macroeconomic gambles – great if it comes off but costly if it doesn’t, as has often been the case historically. Our approach, based upon a diversified range of strategies, with a focus on cross markets anomalies, controlled duration risk and positioning around bond supply has been overlooked, in favour of the flashier approach. Thankfully, this is now changing.


Government bond markets sold off steeply last Friday, despite some reassurance from the US PCE index, a measure of consumer price inflation. In the US, 10-year rates closed at 4.4%, 15 bps higher on the week whilst the UK equivalent rose by 10bps to settle just below 4.2%. There was little movement in credit spreads and corporate news flow was limited. Bouts of volatility in government bonds should continue given the data dependency specified by central banks in their interest rate settings. It is an environment that suits active bond management – particularly those managers with a disciplined approach to risk.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

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