Macro management a key challenge for Aberdeen

Aberdeen Asset Management's head in Australia, Bill Bovingdon, says the way in which central banks manage the conflict between slowing economic growth and rising inflation will be crucial for fixed-income investments.
Bill Bovingdon is the CEO and head of fixed income at Aberdeen Asset Management in Australia. He joined Aberdeen in 2007 following the firmÆs acquisition of Deutsche Asset Management (Australia) and became CEO of the Australian business in April 2008.

Previously, he joined Deutsche as head of its Australian fixed-income team in 1999. He was a key member of various asset allocation committees at Deutsche, where he was responsible for shaping that fund houseÆs fixed-income business in Australia; in 2006, he took on the additional role of deputy CIO at the fund house.

Bovingdon shares his views about the global fixed-income market with AsianInvestor. As a group, Aberdeen Asset Management manages around $220 billion worldwide, around 48% of which, or $106 billion, is in fixed income. The Australian fixed-income team manages around $10 billion in assets.

Where do you see the main opportunities in the global fixed-income market?

Bovingdon: Financials and residential mortgage backed securities have suffered the worst spread widening throughout the credit crisis and we believe current levels more than compensate for the risk. We aim to increase our weight to these sectors with stock selection being ever more important.

What purpose do fixed-income investments serve during these volatile times?

Fixed income is an important part of any balanced portfolio, particularly in volatile markets. When economic growth slows fixed income tends to be the only part of the portfolio producing positive returns and can offset the losses that may arise from holding equities.

For example in the last two recessions, fixed income outperformed equities by more than 10% in the 1990/1991 recession and more than 20% in the 2001 recession.

There is still a perception that fixed-income instruments are passive investments. How do you actively manage a fixed-income portfolio?

We actively manage our portfolios through global credit selection covering both investment grade and high yield, allocations made to emerging market debt where we can go long and short, and an active derivative overlay where we take long and short positions in various interest rate and currency markets.

What are the main challenges of investing in the fixed-income market at the moment?

Macro management will prove to be a challenge as there is currently no clear indication of how central banks will manage the conflict of the slowing in economic growth versus rising inflation around the globe. Credit markets still face a number of challenges. While the worst of the mark-to-market losses for banks are likely behind us, we expect a headwind for bank earnings from higher loan losses as a result of the weaker economic environment. On the corporate front we expect the combination of tighter lending, higher raw material costs and weaker demand to begin to weigh on corporate results, which is likely to lead to wider spread dispersion between strong and weak credits.

The Aberdeen Core Plus Fund was launched in August 2006, but it changed its strategy in January. Why was the strategy changed?

In June 2007, Aberdeen bought the Australian Fixed Income arm of Deutsche Asset Management. Once we joined Aberdeen, we reviewed how they ran Core Plus around the globe and adopted the same philosophy for the Aberdeen Core Plus Fund in January 2008. This meant changing the global components of the Fund from Deutsche to use AberdeenÆs capabilities of global credit, high yield, emerging markets debt, and derivative overlay strategies of rates and currency.

What was the previous strategy and what is the new one? How does the new strategy better serve investors?

The Australian fixed income part of the portfolio remains unchanged. The global components are now managed by AberdeenÆs global fixed income specialist teams who have been managing money this way for more than seven years. The product is much more flexible now and enables us to tactically allocate and respond to changes in market conditions.

The product is now in line with AberdeenÆs successful philosophy of how to run a Core Plus Fund. We also have access to robust risk and front office systems to better understand the investments across the portfolio globally.

What is the allocation of the portfolio?

We currently have 65% of the portfolio allocated to Australian fixed income. About 25% is in invested in Global Credit and 3.5% in our emerging markets debt strategy. We also run static allocations to our derivative overlay strategies.

The fund will have on average a 60% weighting to Australian bonds. We think it is important for Australian investors to have exposure to the Australian bond market to help offset their domestic equity portfolio. We then use the global fixed income universe and our specialist teams to add value over the Australian Composite Bond Index.
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