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Harvey Bradley, gestor del BNY Investments Absolute Return Bond fund, considera que toca extremar la cautela y diversificar ante la proliferación de riesgos en el mercado de crédito.
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00:04Hola a todos, me llamo María Gómez Silva y les saludo desde el estudio de la revista
00:08Inversión y Finanzas.com. Hoy vamos a retomar el tema de los fondos de retorno absoluto.
00:14Ya saben, esos productos que tratan de obtener retornos positivos en cualquier entorno de
00:19mercado y que en este momento, con las valoraciones en niveles tan elevados, pueden tener un sitio
00:24en las carteras. Para hablar de ello tenemos hoy con nosotros a Harvey Bradley, gestor
00:29del BNY Mellon Absolute Return Bond Fund. Harvey, gracias por acompañarnos hoy.
00:34Thank you, es muy bien estar aquí.
00:37Harvey, a few months ago, we had the pleasure of speaking with Raf Felder, who es el Managing
00:43Director for Iberia and LATAM at BNY Investments. Raf highlighted this fund as a strong option
00:50for investors facing a volatile environment such as ours. With that in mind, I'd like
00:57you to revisit how the context has evolved since then.
01:02Yeah, in terms of the macro and economic environment that we find ourselves in, it's been a year
01:07where markets have performed very well. Equity valuations have continued to move higher and
01:13higher. And when we have had speed bumps in the road along the way, the market has got
01:18over those pretty quickly. So we had Liberation Day in April, big drawdowns. But in both equity
01:24and credit markets within a month, you were back to or above the valuation points that
01:29you were pre that event. We've had some concerns about fiscal and geopolitics through the year,
01:35some concerns around the monetary policy independence of the Fed in the US, but these have all been
01:40brushed off pretty quickly. So when we think about markets, there are a lot of known risks
01:45out there. The black swan events, you can't see coming. White swans, you're certain as to what's
01:50going to happen, you can predict the impact. A lot of the risks we're talking about are grace
01:54swans. So the markets know they're there, but they're not priced in. And what are those
01:59key risks? It's the risk of recession going up because of trade and tariffs. It's fiscal
02:04sustainability as we get into next year. US, France, UK have been key focuses for the market
02:10there. But then also it's the relationship between fiscal and monetary policy and the US
02:15administration potentially politicising the Fed. None of these things we think are priced in and
02:21generally have downside risks for beta markets. So that's something we think investors need to
02:26think about moving forwards. Volatility is not dying down anytime soon. The fund has delivered
02:32positive returns since April, since Ralph was here. Could you share what drove that performance
02:39and how it compares with your expectations earlier this year? Yeah, the strategy is one that's designed
02:46to produce positive returns in all market environments. So whether yields are going up or
02:51down, whether credit spreads are widening or tightening, we should be looking to add alpha for our clients in
02:57the strategy. What's driven the positive return through the middle of the year has been an overweight
03:03position in duration. So we had been looking for, particularly in the US, more Fed cuts to be priced
03:10in as downside economic risks played out in the data. We've started to see below expected inflation
03:16prints, but also the labour market starting to crack. Alongside that, we've been cautiously positioned
03:22in credit all year. So valuations are pretty expensive. You're tight relative to history,
03:29tightest level of credit spread since the financial crisis in most major markets. So we've been cautious.
03:35And through August, if credit spreads have started to widen, as some of these risks we mentioned
03:40previously started to come back to the top of investors' mind, that's helped to be a benefit
03:45for the portfolio as well. It's been a small positive return relative to cash. We haven't kept up
03:50with beta markets as valuations keep moving higher, but by design we're running lower risk than we
03:56typically would. We don't see the risk reward being favourable in credit. We won't take risk unless we
04:02see a compelling reason to do so, given this is a defensive strategy for investors. And so we're
04:07comfortable taking lower risk, delivering that small but positive return for clients. And we're hopeful
04:13that next year will be a really positive environment for these strategies that are genuine diversifiers
04:19in investors' portfolios. And how has the portfolio positioning evolved since April in terms of
04:25geographic allocation? In terms of geographic allocation, on the government bond side and
04:31interest rate side, we've spent much of the first three quarters of the year overweight US duration,
04:37as described, looking for Fed cuts to be brought forward. But that view has now played out. So where we
04:43were overweight interest rate duration in the US, we're now actually underweight. And our overweights in
04:48duration are expressed in the likes of Canada. Why Canada? Greater downside risks from the impact of
04:53tariffs. One place that has not yet agreed a trade deal with the US, but is their largest export
04:59partner. But also in Australia. Why Australia? It's a market that's underperformed. You haven't had as
05:05many rate cuts delivered to date. But if we look at some of the tail risks, and the key one
05:10here that we
05:10would highlight being fiscal, Australia amongst developed markets is one of the very few that's on a more
05:15sustainable footing. The budget deficit is closer to balanced already. So if the market does start to
05:21worry about fiscal sustainability, government bond issuance again, it's a better place to take your
05:27duration risk in the strategies. Okay, in August, the fund benefited from short positions in corporate
05:34credit, and spreads widened. Do you still see credit markets as vulnerable? Or have your valuations become
05:41more attractive? Valuations have become less attractive in our view through the year. As you
05:46mentioned, we have started to see some spread widening. This is a strategy that can benefit from credit
05:53spreads moving wider, as well as moving tighter. It's not a product that relies on risk assets
05:58performing well to generate returns. As you mentioned, we have been small underweight in credit,
06:04there aren't too many absolute return managers who will actually go underweight credit because of the
06:09cost of carry. But in our view, all of these macroeconomic risks that are building, they're pretty
06:14much all negative for credit, whether it's that inflation moves higher again, whether it's that
06:19the fiscal policies means yields move higher in risk-free rates and a higher cost of financing
06:25for these companies, whether it's the lagged impact of tightening delivered to date, starting to come
06:31through. And we are potentially seeing some individual names start to run into problems,
06:36in particular within US private markets. So we've had a couple of names in the past couple of weeks
06:41who have run into problems on auto loans with Tricolor, but some other names as well. So potentially,
06:47we're starting to see some cracks there, and that may percolate through broader financial markets.
06:53And in our view, with the level of credit spreads that we have, so globally, we're through the 25th
06:58percentile, similar levels to where you were just before the financial crisis in 2006-2007,
07:05investors aren't being compensated for these risks. And you'll always hear arguments about
07:09why this time is different, why credit spreads can continue to tighten, but this time is different,
07:14they're potentially the four most dangerous words in investment. And in our view, investors should be
07:19very cautious with their credit exposures moving forward. Yes, it's worked very well,
07:23but when credit markets turn, you tend to see spreads widen pretty quickly. So you need to be
07:28prepared ahead of time and seeking out defensive, diversifying strategies like the Absolute Return
07:34Bond Fund.
07:34And what about the political risk in France? How do these developments shape your tactical decisions?
07:42Yeah, France has been a key theme for markets as well, particularly, obviously, those who have
07:47European-focused allocations or benchmarks. You've seen gradual widening of France relative to other
07:54Eurozone sovereigns, but I would emphasize the gradual. We haven't seen any sharp moves at this point.
08:00And when you're talking about a spread of 80 basis points over Germany,
08:05that's not too much risk premium that's been put into date. You've started to see the downgrades
08:10come through from the ratings agencies. We would expect more to come in the fullness of time.
08:16When you look at the debt dynamics compared to Eurozone sovereign peers over the past four or five
08:20years, France is really the only one that's had meaningful deterioration. The likes of Italy and Spain
08:26have both improved their debt dynamics, in part helped by strong nominal GDP growth and also
08:31inflation. In France, we just don't see a way out of the political malaise that we've had to actually
08:37make progress on bringing that budget deficit back under control, reigning in spending, which
08:42ultimately would help delay or put off those further ratings downgrades that we're expecting.
08:46So we now are in a window where we could get new elections at any date. Macron is trying to
08:52avoid
08:53that. But we don't think there's a plausible way through. So in our view, it's something that we're
08:58going to continue to remain underweight relative to other Eurozone sovereigns. Ultimately, it's building
09:03to that punctuation point of the president election in 2027. The trend not just in France, but other markets
09:11as well, it's clearly been towards parties on the edges of the political spectrum, populist parties
09:17with non-traditional mix of maybe economic and social policies. And maybe that's where we end up
09:22going in France. And until it's staring the market in the face, maybe we won't see that more aggressive
09:27spread widening that we've seen in years gone by when the likes of Italy have run into political
09:32challenges. 2018 comes to mind, where, yes, initially you had 10 to 20 basis points of spread widening,
09:39but very quickly when the market recognised there was no path through, you were talking
09:43about 100, 150 basis points wider. So in our view, investors should continue to be cautious
09:48with French sovereign risk in their portfolios. ESG considerations form part of your fund's
09:54approach. How do you integrate ESG factors in your strategy?
09:58Yep. So the fund itself is Article 8 compliant. It's not the primary objective of the portfolio
10:04to achieve sustainability goals, but it's something that embeds our investment philosophy.
10:09Primarily, we use ESG to manage downside risks in the portfolio. So where there's physical
10:15climate risk, perhaps for an issuer, or there are social or governance factors that are a
10:21potential challenge. We have it embedded within our security selection process. So we supplement
10:26your traditional fundamental bottom-up credit analysis with work by the analysts with what
10:33we call our landmine checklist, which is a series of quantitative screens that are there to identify
10:38key downside risks in portfolios. If something screens as worst in class within their sector,
10:45it doesn't mean we can't necessarily invest in the issuer, but it triggers a conversation between
10:50portfolio managers and analysts to establish why its screening is worst in class. Two of those factors
10:56are ESG related. So one is ESG, one is climate risk, and it helps give you protection, particularly against
11:04if you're using other firms' views or industry providers as to what a good or bad ESG name is.
11:10We strongly believe that if you want to do ESG properly, you need to have your own teams. We have
11:16a large responsible investment team to give us our view of what's a good or bad name, not someone else's
11:21in the strategy. And first and foremost, that gives investors protection to the downside when things go
11:26wrong. So Wirecard, a German financial services company a few years ago, MSCI would tell you that was an
11:32average name in the space. We had it as worst in class, ultimately had a governance failure. We didn't hold
11:37the name because of those concerns. What's important to remember in fixed income is your upside is capped
11:44whenever you're making an investment in a bond. It's not like equity markets where you need to find that
11:49exposure and your upside is theoretically unlimited. For us, it's about downside risk management. The downside is
11:55unlimited. Your holding could ultimately go to zero. So we need to be extra vigilant on those downside factors.
12:01And ESG is an important risk management tool for us in the strategy.
12:05You have mentioned it before, but for investors seeking diversification and stability, do you believe the absolute
12:12return bond fund still offers a compelling proposition in today's market?
12:18I think it's more compelling than it has been with the macro environment that we have.
12:23The two key things that the strategy aims to give investors is diversification to firstly, traditional fixed income
12:31products, but secondly, other asset classes as well. When we screen the fund and run the numbers in correlation since
12:38inception of the strategy, it has a very low or zero correlation to most traditional fixed indices.
12:45Investors are having to work hard to find true diversification. So for the past 20 years, pre-COVID and the
12:52macro regime change that we had, duration was a good diversifier in portfolios. When risk assets struggled, your duration worked.
12:59It bailed you out. In the past two or three years, that relationship has changed.
13:03As we've gone towards de-globalisation, more trade friction, more divergence between markets, that correlation has actually gone positive again.
13:11So we think investors are going to have to work harder to find true diversification. The fund can hopefully do
13:16that.
13:17But also the other key objective is downside protection.
13:20So when markets are challenging, when valuations look expensive, this strategy should be able to give you that, given it's
13:27agnostic to the direction of either interest rate or credit spread markets.
13:32And again, valuations are pretty expensive, whether you're looking at credit spreads that are very tight or equity markets where
13:38price to earnings multiples are close to as high as they get.
13:41Now, maybe we grow our way out of these challenges. Maybe AI, the data centre build out in tech is
13:48transformative and nominal growth is strong enough to get us out of it.
13:51But you often hear that and it's rarely been delivered in the past.
13:54So we would be sceptical of the valuations in markets and think investors should be looking for defensive propositions and
14:00diversification as we move into 2026.
14:04Can you elaborate a little bit more on what are the key risk and opportunities that you are monitoring into
14:132026?
14:15Yeah, key opportunities for us and where we're running most risk in the portfolio at the moment would be in
14:20the macro space rather than credit.
14:22Our credit risk is very low, given we're cautious.
14:25On the macro side, mentioned how a duration we've been reducing our overweight positions towards neutral,
14:31where we do see compelling risk return is in relative value within interest rate markets.
14:37So on country selection, underweight the US relative to the likes of Canada and Australia, as described.
14:42Within Europe, underweight France against a combination of Italy and Germany.
14:47Italy, because we can see continued economic outperformance, the debt dynamics there are improving,
14:53but also to help offset some of the carry given up by being underweight France relative to Germany.
14:58But our biggest macro position is actually in yield curve shapes.
15:02So a very popular position for global macro investors for the past two years has been yield curve steepeners.
15:09I think most investors have liked that as a theme.
15:11We've benefited from that in our portfolios.
15:14We do think the steepening can continue, particularly in the US, but potentially European yield curves as well,
15:21as fiscal starts to come online next year.
15:23What's changed for us, though, has rather than just running steepeners on their own,
15:27we've added flattening positions in some favoured markets against that steepening in the US.
15:32We've added flatteners in Japan, where long dated yields are very attractive on a hedged basis.
15:37The yield curve is very, very steep.
15:40But in the UK as well, where there's additional risk premium compared to somewhere like the US,
15:45which faces many of the same challenges.
15:47What could drive that steepening in the US?
15:49It's mainly protection against some of the tail risks we see.
15:53So it's central bank independence.
15:56If the US administration moves towards politicising the Fed, appointing a friendly voice as the Fed chair,
16:02it protects us against more fiscal being done, both of which should be yield curve steepeners.
16:08Now, what's your main risk in the US against that?
16:10It's unconventional Fed policy.
16:12Maybe if they do some sort of operation twist, maybe if they try to cap long dated yields,
16:17knowing that politicising the Fed would lead to significant yield curve steepening.
16:21So in which case, what becomes your outlet valve then?
16:24It would likely be inflation.
16:26So potentially US inflation, we think, is attractive as a protection against some of these scenarios.
16:31But it should also mean the dollar continues to weaken as well.
16:35OK, thank you.
16:36That brings us to the end of the interview.
16:38It's been a real pleasure having you here.
16:40Thank you for your time.
16:41Thanks very much for having me.
16:44Y a ustedes, gracias por estar ahí y hasta pronto.
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