Your questions answered by 1167 Capital during the Investment Week Fixed Income Market Briefing



Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the makeup of the investment team?

G10 government bonds have traditionally offered investors a unique combination of positive returns, low volatility and ballast for risky assets – the “40” in “60:40”. Yet for many years now, G10 government bonds have struggled to deliver these qualities.

Their yields have fallen to exceptionally low or even negative levels. Their prices have therefore become vulnerable to the slightest rise in inflation. Even their ability to act as ballast is in question, with US and European interest rates already stuck at zero or below zero. As a result, investors found themselves deprived of an essential tool in portfolio construction.

So far, that is. The past decade has seen a major shift in the world’s economic architecture: the emergence of China as the world’s second-largest superpower.

China’s economy is already the largest in the world by some measures, and growing much faster than those of the United States or the eurozone. China is not suffering from the “secular stagnation” that has raged in the G10 for a decade. And China has weathered the SARS-CoV-2 pandemic with a fraction of the economic damage suffered by the United States and Europe.

The result is a government bond market second to the United States, tied to an economy that still enjoys high growth rates and a normal business cycle. With consistently positive returns, low capital volatility, and a proven track record as diversifiers of global risk assets, Chinese government bonds are expected to be one of the major reserve assets for decades to come – and a valuable addition. to any global portfolio.

How are you positioning your portfolio to prepare for the global recovery from the Covid-19 pandemic?

The 1167 China Government Bond Fund will aim to give investors access to the three main advantages of the asset class – income, low volatility and portfolio ballast – in a well-designed and profitable product.

Holdings will be limited to Chinese government bonds only – the Chinese equivalent of US Treasuries or UK Gilts. Many products choose to add bonds issued by state banks or local governments into the mix, in order to slightly increase portfolio returns in exchange for taking credit risk. We don’t think this compromise makes sense. The objective of a government bond fund is to provide exposure to the pure sovereign liabilities of the country in question: they must therefore remain loyal to government bonds, and not be contaminated by a lower credit risk. quality.

Like traditional active management of bond funds, the duration of the portfolio will then be actively managed with the objective of maximizing the risk-adjusted returns available. In the bullish phase of the business cycle, when the yield curve steepens, the portfolio may focus on shorter maturities, thereby reducing duration. As the cycle matures and the yield curve flattens or reverses, a longer duration becomes optimal, in order to capture potential capital gains from a rising yield curve.

Can you identify some key investment opportunities for your fund that you are currently playing in the portfolio? It can be a stock, a sector or a thematic level.

China is already by some measures the world’s largest economy – accounting for 18% of world production on a PPP basis and about a fifth of all world trade. The Chinese currency, for its part, represents 11% of the IMF’s basket of global reserve currencies.

Yet China’s share of many investors’ portfolios is far lower than these numbers suggest – and especially on the bond side. For global investors, Chinese government bonds are often the most important de facto underweight in their asset allocation.

With the opening of the Chinese government bond market to foreign investors through the Bond Connect system – which allows funds like the 1167 China Government Bond fund to maintain custody in Hong Kong with Northern Trust, its global custodian, while dealing transparently via the Bloomberg trading system – it is likely that many global investors will seek to remedy this underweighting in the months and years to come.

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