Our Insights

About personal finance, investments and markets.
September 1, 2014

Top fund manager interview – bond specialist Kathleen Gaffney

From time to time we will present here portfolio managers who have shown an outstanding track record in the past and whose market insights we rate very highly. Kathleen Gaffney is one of the most successful bond fund managers of the US – over the last year, she was better than 99% of her peers and delivered an exceptionally strong 19% return.

We recommend the following interview for all investors that currently have or seek exposure to bonds and credit.

Our summary of her market view:

  • The traditional bond market today seems over-valued and the risk-reward has become unattractive. Investors now pay high prices for low returns.
  • Bonds have become the riskier investment, stocks the safer investment
  • The US recovery continues and Kathleen expects rates to rise soon. For bonds that are not held until maturity, this could mean negative returns.
  • The High-Yield corporate bond market looks particularly overvalued
  • Convertibles are an interesting market niche
  • Liquidity in the bond market has become very poor to the point that a small change in fundamentals can trigger a material change in prices. Currently there are virtually only buyers in the market, but what will happen when rates rise and there will be more sellers? The buyers might not be there any more or at significantly lower levels. Banks who used to provide the liquidity for the secondary market and could act as a buffer have cut their inventory by about 75% since 2007.
  • In this transition from a falling to a rising interest rate environment, fund managers need to be flexible and not be constrained benchmark-huggers. She can hold up to 20% in equites and fully utilitises her mandate at the moment.
  • In the Emerging Markets she currently favors Mexico and India.
  • Best investment today? Suprisingly she mentioned cash. With 20% currently her cash position is also far above the usual level of around 5%. With interest rates so low, the opportunity costs for holding cash are equally low. Cash has optionality and gives flexibility to act swiftly. When opportunities arent’t present like today, don’t feel pressured to be fully invested.

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