One of my big frustrations as an investor is that I’m always way behind on my reading. There is too much information, too much interesting stuff published, too many things I don’t know enough about and too many things I’m afraid to miss.
I constantly make different piles of stuff I feel I need to read to keep up. Stuff on these piles changes priority all the time. Like the ebb and flows of markets, items move back and forth between the 'high priority list', the 'weekend or holiday reading list', the almost hopeless 'Xmas reading list' and finally the – we all know what this means – 'once-I-have-time reading list'.
Catching up with my reading list can make me truly happy. A day when I’m able to make a temporary dent in my lists is a good day even though I know the dent is artificial. It helps to maintain the illusion that one day …… I finally catch up on all my reading plans. Last week I had an evening I could properly feed my information addiction and catch up on reading. Mrs van den Heiligenberg was out and the French elections were not yet in full swing. One of the articles I really liked was by my fixed income colleague, Mark Benstead: In defence of duration.
Mark makes the non-consensus case for holding bonds in a portfolio. He describes the lower-for-longer theme very well:
“In our view, however, yields are at depressed levels because the world is in an unprecedented mess due to a gross excess of fruitless debt – not vice versa. This excess, along with stubborn deficits, an astonishing demographic deceleration and ongoing deflationary impulses from supply excesses and Chinese currency policy, will continue to be powerful structural impediments to long-term growth.”
“Increased leverage – be it personal, corporate or government – isn’t necessarily an impediment to growth, but it is an obstacle to higher rates.”
We very much agree that it’s unlikely the world will return to historically normal interest rates. As outlined all the way back in November 2014, we expect real yields to remain around zero as demographics, high debt burdens, a savings glut in Asia, financial repression and quantitative easing continue to either increase demand for savings or depress investment (see chart).
We do believe however that the economic cycle, although it is far from normal, remains important in the 'lower-for-longer', or as Mark calls it 'secular strangulation narrative. See my previous blog Cyclical views and structural blues for more detail.
Whatever the name of the theme and the importance of the economic cycle we fully subscribe to Mark’s conclusion:
With fixed income offering less income, the case for owning it as diversification and protection becomes ever more important. And as a crucial part of that diversification and protection, duration should be embraced – not shunned.