Investors seeking safe havens in a low-yield environment should consider China’s fixed income market, suggests Matthew Jones, Eurizon SLJ Capital’s head of distribution for the UK.
Mr Jones told Fundeye that China offers a best of both worlds’ situation, with its fixed income market outperforming its developed counterparts, while also being less vulnerable to negative shocks than emerging market bond strategies in other countries.
In his view, it was the closest investors could get to the stable fixed income strategy formerly provided by European markets, or even the US.
He said: “It behaves likes a safe haven and a developed market bond fund. It rallies in times of distress. Combine that with the fact that Chinese 10-year bonds are still offering circa three percent yield, and compare that to developed markets. That's a very attractive yield.”
Mr Jones summarised a series of case studies Eurizon SLJ previously carried out on five separate risk-off events over the last 20 years, including the financial crisis of 2008, the European debt crisis of 2011, the emerging market sell offs in 2016 following the taper tantrum, the 2018 downturn, and the COVID-19 pandemic.
The results revealed that in comparison to major markets, and Chinese fixed income rallied in each of those episodes, and offered a perfect hedge to the FTSE 100. Its total returns remained considerably more stable than the Western counterparts, offering an attractive yield and behaving like a safe haven asset.
The head of distribution believed this reaffirmed the valuable opportunity presented by the Chinese fixed income market, especially because it remains largely untapped internationally. The Chinese government is working to increase the level of foreign ownership, which remains circa three percent.
He said: “I think the opportunity is quite astounding. The opening up of that market is probably one of the most significant macroeconomic events of the last 20 years. The benefits for UK investors, in particular, from a diversification perspective, from a yield perspective, from a safe haven perspective, are really compelling.”
Mr Jones outlined his perspective as part of a wider discussion about his role head of distribution for the UK at Eurizon SLJ Capital, which is UK asset manager of the Eurizon division. Eurizon SLJ Capital is the asset manager of Intesa Sanpaolo Bank.
His role wears a few hats. As head of distribution, he is in charge of sales and marketing for the UK business. He was hired to help launch the UK asset management business, which unveiled its domestically domiciled OEIC vehicles in February earlier this year. While targeting UK investors, they are focused on overseas opportunities. He specialises in fixed income investing, and in finding alternative opportunities to investors looking to diversify their portfolios.
The funds he is responsible for include the Local Emerging Market Local Currency Debt Fund, and the freshly unveiled China Onshore Bond Fund. This is the first UK domiciled China onshore bond fund, and it invests exclusively in the Chinese onshore bond market.
These products exist in addition to Eurizon SLJ’s other funds, which include Eurizon SLJ Aggregate Bond RMB (Renminbi) Strategy, Eurizon SLJ Enhanced Currency Strategy, and the Eurizon SLJ Global Macro Strategy.
Mr Jones is also in charge of the distribution of that research, alongside his fund roles. The firm utilises a research-led approach, pursuing its own findings and information through in-house analysts. This has recently included research on Chinese policy banks, the Indian rupee, and the optimal Sharpe ratio mix. In addition, he uses SharingAlpha for analysis, and its UK vehicles are listed on the platform.
Commenting on the importance of research, Mr Jones said: “We are research led in our approach to investment management, and that's crucial to us because the other large part of our businesses is our macroeconomic research capability. We sell that to central banks, sovereign wealth funds, asset managers hedge funds around the world. That’s the starting point of every single decision and investment vehicle that we that we manage.”
Eurizon SLJ’s research-driven outlooks on safe-haven alternatives contrast with the positions of other firms. Barclays continues to push hedge funds as a viable alternative, while Orbis has pushed the idea of reforming the 60-40 portfolio split for a sustained period of time.
His counter to these conclusions is to point to the Sharpe ratio analysis undertaken by Eurizon SLJ. When looking at historical asset allocations, it revealed that the best Sharpe ratio, at least in theory, could be created through a 50 percent allocation to US tech and a 50 percent allocation to China, fixed income.
Meanwhile, the traditional aspects of asset management still mattered, despite the pandemic. Fixed income needs to provide a strong focus on quality and liquidity, while a focus on quality needs to go beyond credit ratings, to issues such as ownership structure.
Mr Jones said: “With credit ratings there's no replacement for the legwork that goes into assessing the overall health of the organisation and the broader quality, and the place a business holds in the economy”
Concluding on his primary observation, he said: “My short answer is for those looking for an alternative to traditional fixed income allocations, I believe that UK investors should be looking to Chinese fixed income as an alternative to their traditional allocation.”
Mr Jones was interviewed as part of Fundeye’s series on SharingAlpha’s leading fund selectors and managers. Recent profiles include our chat with Peter Lenart, head of investment research at A&J Wealth Management, about value plays, and our discussion about rising investment costs with VWM Wealth Management's chief investment officer, David Thomson.