Germany’s Largest Money Manager Likes Volatility, Illiquid Bondsby
Liquidity drying up in debt markets may lead to opportunities
BofA financial stress index at highest levels since 2011
Market turbulence is here to stay, and fund managers should embrace it, says Germany’s biggest money manager.
“Volatility is usually seen as a risk, but I see it more as an opportunity,” said Stefan Kreuzkamp, the chief investment officer of Deutsche Bank AG’s asset-management arm, whose main fund is striving to catch up with peers. The firm oversees 739 billion euros ($828 billion). “Now is the time when the wheat is separated from the chaff and good active portfolio managers come to the forefront.”
Concerns over global growth, the timing of Federal Reserve interest-rate increases and disappointing corporate profits have compounded to make this year the most volatile since the European sovereign-debt crisis. Kreuzkamp says the way to profit from the turbulence is to be selective in picking assets and building up positions when the rest of the market sells. While he did not elaborate on specific positions, he said he likes rarely-traded corporate and government bonds with longer-term maturities.
“There are a lot of fixed-income assets that are good quality but, due to their structure, have a maturity of 10 years or more, and have a relative significant premium” in yield, Kreuzkamp said in a phone interview from Frankfurt last week. “If you’re willing to take this liquidity risk, you can make pretty decent returns.”
Investors around the world are grappling with a decrease in bond-market depth, which may raise transaction costs and make it more difficult to exit positions, particularly in more obscure parts of the market. That’s because banks are shrinking their debt-trading activities to comply with regulations such as Dodd-Frank and Basel III, reducing their ability to build an inventory of securities that carry additional risk.
Michael Lillard, who oversees more than $600 billion as head of fixed income at Prudential Financial Inc.’s asset manager, addressed the liquidity issue last week, saying that the new environment presents challenges, but also opportunities for traders who are willing to pounce on market dislocations. He favors highly rated U.S. commercial mortgage-backed securities and high-yield credit in the American nation and in Europe.
The strategy hasn’t quite worked yet for Kreuzkamp. Deutsche Asset’s revenue fell 12 percent in the first quarter, and his biggest fund, the $377 million Deutsche Institutional USD Money Plus, has trailed peers in the past three years, data compiled by Bloomberg show. That may be changing now: the fund, which invests primarily in debt and convertible bonds, has outperformed its rivals in the past month.
Many investors have suffered in 2016, with global equities down, while haven assets such as gold and the yen have jumped. Bonds had the best start of a year since at least 1997, returning 3.2 percent in the first quarter, according to the Bank of America Merrill Lynch Global Broad Market Index. At its bottom in February, the MSCI All-Country World Index had lost 12 percent and was on track for its worst year since 2008 before it pared most of its losses.
“By February, many portfolio managers’ risk budgets were already facing a lot of stress,” Kreuzkamp said. “We decided back then not to dismiss anything in the market and continued to invest.”