11 October 2017
Future returns in fixed income will be found in unconventional places or directions.
Today’s bond investors have their work cut out: Government bonds remain expensive, yet intermittent rallies will be too lucrative to ignore. Corporate bonds have their best days behind them, economic growth is uneven, but not weak, and inflation appears to resurface. Squaring these circles and squeezing uncorrelated returns from the interacting forces of macroeconomics and central banks is Tim Haywood’s job, manager of GAM’s flagship USD 10 billion Absolute Return Bond strategy.
“Core bond yields are likely to rise over the coming two to three years.” This straight-forward assessment from GAM’s bond fund manager Tim Haywood is hardly surprising. But it raises the question where positive returns can be generated within the asset class. Haywood spells out the challenge: “We may see losses in developed government bonds during, say, nine out of the coming 12 months. Our aim is to profit from these yield-rising moves, which we have historically had a good track record of achieving in our absolute return strategy. But the interesting part is to get the switch right when the bond market turns more bullish again, as is likely from time to time.”
Phases of core government bond strength without great stress in the credit market indeed proved painful for Haywood’s strategy in late 2014 and late 2015. But a review of the capital protection themes led to encouraging results last year and in 2017 thus far. Haywood explains: “We increased the use of our in-house developed models that can act like fire extinguishers in the case of a rapid market shift. These models use systematic signals to quickly add duration and reduce currency risk if needed. They give us comfort to run our long-standing core themes for longer or indeed all the way through phases of heightened volatility.”
A new route to beat zero-yielding cash
The fund manager is particularly excited about an innovative asset class that his team has added to the strategy some time ago. “We believe that future returns in fixed income will be found in unconventional assets, or occasionally being short conventional ones. We purchased insured notes comprising trade receivables as a means to replace some of our cash and near-cash allocations. Most short-dated bonds still produce negative yields, while banks penalise investors for holding cash on deposit. Hence, the yield on 60-day instruments is around 1% in US dollars and, amazingly, a positive number in euros.”
Haywood adds: “One of the few positive effects of today’s low-rate environment is that it forces us to explore corners in the market for debt finance where risk is still straightforward, manageable and rewarded, and where liquidity is improving. As we became convinced about the merits and sustainability of insured supply chain finance as part of our absolute return product, we have also added a stand-alone product to our offering, which investors should really consider as an alternative to their cash holdings. On a related note, our absolute return product is a viable alternative to long-only bond allocations, where periodic losses are likely over coming years.”
From CEO to head of state – Haywood has seen it before
When Tim Haywood joined London’s City on 19 October 1987 – Black Monday! –, the multi-decade bond bull market, whose end we are just witnessing, was still in its infancy. Not that it mattered to him at the time: His first job was small-cap UK equity analyst at ANZ Merchant Bank. Next, he joined a start-up stock brokerage, and after a brief stint at the financial regulator following his MBA, he went into fixed income management at Manufacturers Hanover, which later became Chemical Bank. After two years there, he joined one of its clients, container shipping company Orient Overseas, as chief investment officer, and moved to Hong Kong in 1994 for four years. Haywood recalls: “The most fascinating aspect of my time there was to watch my boss, Tung Chee Hwa, CEO of Orient Overseas, become the first chief executive of Hong Kong after the British left in1997. The experiences that Donald Trump is going through were faced by Chee Hwa, in that running your own business is very different from governing a country.”
Back from Hong Kong to London, Haywood started at Bank Julius Baer in 1998 as emerging market bond manager, with Paul McNamara who had joined as an economist a year earlier. “In the year 2000, the two of us launched the Local Emerging Bond strategy, which at the time was seen as a novelty. Internally, people were not sure about it since the asset class was seen in terms of US dollar bonds only. Paul took over the lead manager role subsequently, and his team’s input remains highly valued by our colleagues on the absolute return products”, Haywood adds. The latter, starting with what is now the flagship Absolute Return Bond strategy, were launched in 2004. Several hedge fund-type bond products had been successful prior, including what has later become the strategy of the Global Rates Funds. Hence, the idea was to design an unleveraged regulated product in the form of a sophisticated UCITS. The rest is history, and with USD 10 billion across the fund family it is also GAM’s single most successful product in terms of assets under management. Haywood is particularly optimistic about its prospects now: “We have finally started to see market conditions across fixed income that really suit our approach: Buy-and-hold is no longer rewarded as extremely easy monetary policy is coming to an end, and macroeconomics and politics are returning to the forefront of investment decisions.”
Asked what made him decide to pursue a career in finance, Haywood explains: “I studied chemical engineering, but it became apparent pretty quickly to me in the mid-80s that industry was not as fast-moving as finance, which, in contrast, boomed after the ‘Big Bang’ deregulation and promised a much more international appeal.”
Heavy involvement in charity work
With Haywood being at home in the world of finance, he is also at home on the farm and with the restoration of his family homestead in Rutland, situated around 150 kilometres north of London. Haywood grew up there and has been involved in the farm’s management since 1985. He chuckles: “I wish I was any good at farming, but I don’t pretend to be, so I leave looking after the crops and the animals and all that to the professionals. But at the weekends I enjoy being involved in restoring the farmhouse, nearby dwellings, woodlands and farm infrastructure.”
Evenings can be taken up by charity work. This mostly derives from his former role as non-executive chairman at the Mercers Company, a 700-year old charitable trust that finances charitable work and also runs schools, churches and housing for elderly. Haywood enjoys actively fund-raising for good causes. He explains: “My two fondest memories were bike rides to raise money for MacMillan Cancer Support, and into which I persuaded clients and colleagues to cycle from GAM London to the GAM office in Zurich in 2012, and in the following year from Land’s end to London. I did that one on a tandem together with my wife. "
Tim is equally at home on land and in the sea, having just completed an 18 kilometer swim from Corsica to Sardinia. Tim points out that this is something he couldn’t have achieved without the support of his friends and family, his wife completed the swim with him, and their invaluable support boat. “Just like our absolute return bond funds, where we employ hedging strategies to avoid nasty surprises, the value of an effective safety net should never be under-estimated.” Tim’s next challenge is the Tour du Mont Blanc, which he plans to tackle next summer with co-manager Daniel Sheard by his side.
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