Lloyd Harris looks back on his first three years with Premier Miton
With the Premier Miton Strategic Monthly Income Bond Fund recently achieving its three-year anniversary, Lloyd Harris unpacks market events and highlights how investment history has a strong habit of repeating itself.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Always the keen student
As a professional investor, you at times need to try and occupy a relatively unique position – playing the role of both a keen student of history and attempting to overlay the learnings from yesterday’s markets on to todays, tomorrows and next years.
In September 2020, while staring at the collection of Bloomberg screens in front of me I couldn’t help concentrating on the here and now – my decision to launch a new fixed income franchise, in the deepest, darkest depths of a global pandemic. But what had I learned from previous global crisis and the bond markets to feel confident that this was the right decision?
Covid had shaken the UK economy like a field of beaten corn. Looking at the headline gross domestic product (GDP) numbers, between April and June 2020, at the height of the first national lockdown, GDP fell by a record 19.8% before rebounding by 15.5% from June to September 2020 as the country reopened over the summer.
This was accompanied by a plunge in equity and bond yields, due to the natural uncertainty a pandemic infuses into economies, markets and day to day life. As an important financing tool and a barometer reflecting investor confidence, a key job for government and central banks was to stabilise markets.
This they did with a round of interventions looking to smooth out distortions in corporate bond markets, while seeing investors shift strongly from risky to safer investments. There was a particularly strong demand for government bonds driving down the UK 10-year gilt yields to 0.21% in September 2020. A challenging time for a bond fund manager certainly with little yield available and a risk averse investor audience.
Our feeling at the time was inflation would reappear. A second round of extremely loose monetary policy and government stimulus – following the ‘kitchen sink’ approach used by some central banks during the global financial crisis, simply had to go somewhere! Layer on top China, ‘the factory of the world’ shutting its doors for an extended period and throttling global supply chains and we had a view that the inflationary genie would soon escape from its bottle, plugged by a cork several decades old.
Day one thousand and ninety-five….
With a global pandemic, not being a distant memory, but certainly a feeling a little more faded like the ‘social distancing’ reminders still occasionally visible around the UK – as a fixed income team we have focused our time, energy and expertise on managing the impact of the inflationary wave that has swept through capital markets.
‘How low can you go?’ was the mantra for long-term interest rates for years. But 2022 saw central banks responding to generationally high inflation with a globally coordinated monetary tightening regime. Both UK bonds and global bond prices have declined by more than any 12-month period in their histories.
In this environment we believed the shift in interest rates marked the end of historical low interest rates and that a new trend of increasing yields meant we needed to hedge the interest rate risk exposure for investors in our fund. We took the position of carrying zero or near to zero duration risk within the Premier Miton Strategic Monthly Income Bond Fund for most of 2022.
While post 2022’s bond market maelstrom, the decline in values over much of 2022 means that bond investors’ potential returns, looking forward from today have an attractive starting point.
But sitting here writing this look-back piece I couldn’t help feeling the last three years although they have felt different, intense, challenging, enjoyable and a unique set of circumstances – they probably aren’t and a reread of the Bank of England Staff Working Paper No. 845 confirms this. It was a special three years, but not a different three years.
It is hard to argue with 700 years of datapoints
Fortunately, as someone who struggles to find the time finish the latest Iain Rankin novel, the Bank of England’s Staff Working Paper No. 845 is fully online and helpfully reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time.
To a keen student of fixed income history this shows me that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’. Which brings me back to my initial point of ‘what can we learn from history’ and ‘what does that mean for me today, making decisions with investors’ money – for tomorrow?’
History rhymes, if not repeats
Looking back to 2020, sitting there day one with interest rates close to zero in the UK following over a decade of a ‘real rate depression’, history shows me this was not a unique position as over the seven centuries, nine historical ‘real rate depression cycles’ can be identified. These all saw a secular decline of real interest rates, followed by reversals and markedly rapid reversals at that. This all starts to feel a little more familiar now particularly through the lens of writing in 2023.
The evidence from eight previous ‘real rate depressions’ is that turnarounds from such environments, when they occur, have typically been both quick and sizeable. Most reversals to ‘real rate stagnation’ periods have been rapid and have taken place on average after 26 years.
Within 24-months after hitting their troughs in the rate depression cycle, rates have gained on average 315 basis points, with two reversals showing rate appreciations of more than 600 basis points within 2 years. To give this some context we are at the 515 basis points in the UK as at today (27.09.2023) – so marked by historical averages, but not a complete outlier.
What ended the previous periods of low interest rates?
Again, back to Bank of England’s Staff Working Paper No. 845 and we find that most of the eight previous cyclical ‘real rate depressions’ were eventually disrupted by geopolitical events or catastrophes, with several – such as the Black Death, the Thirty Years War, or World War Two – combining both demographic, and seismic geopolitical events.
Most cyclical real rate depressions were also closely followed by with inflation building momentum. History rhymes, if not repeats and the closest historical analogy to today may be represented by the global ‘Long Depression’ of the 1880s and 1890s.
Following years of a global railroad investment frenzy, the infamous ‘Panic of 1873’ heralded the advent of two decades of low productivity growth, deflationary price dynamics, and a rise in global populism and protectionism – a trend we see building rapid momentum today both in geopolitics and in reshoring of post Covid supply chains.
Many happy returns!
Looking at past cyclical patterns, the evidence suggests that when rate cycles turn, real rates can relatively swiftly accelerate – 700 years of data tells us that, as well as the very real experience of the last three years managing the Premier Miton Strategic Monthly Income Bond Fund.
Now our job as a professional investor in bonds is not to try and work against the ebbs and flows of interest rates, the central bank policy or government stimulus – it’s to work with these counterparties and trends, both long and short term and look for areas to capitalize on.
It’s about being aware of yesterdays and more importantly today’s global economic environment and financial market conditions, not being held to ransom by their unpredictable nature and then looking to invest where we see opportunities.
As the saying goes – do not fight the central banks, we prefer instead to take the opportunities they create doing their job. History suggests there will be plenty of them.