Bond Fund With $5 Billion Weighs ‘Horror’ of Trump Stagflation

  • Alfred Berg shortening duration on portfolios post-Trump win
  • Fund is spreading corporate bond reach across Nordic region

What if the real estate mogul preparing to take over the White House creates inflation, but no real growth?

Stagflation is the potential “horror scenario” that the head of fixed income at Alfred Berg Kapitalforvaltning AS in Oslo says unnerves him about President-elect Donald Trump’s policies.

“I’m not convinced that what Trump stands for will create that much growth,” Morten Steinsland, who oversees $5 billion in bonds fund at the firm, said in an interview on Monday. “But I’m rather convinced that it will create inflation. So that would be a terribly negative spiral. It’s not good for anything in the world.”

Though it’s not the asset manager’s main scenario, “it can’t be completely excluded,” he said.

Investors have already backed away from bonds on anticipation that Trump will reflate the global economy. The reality TV star’s promises of fiscal stimulus are expected to boost growth. But his protectionist trade policies could ultimately hurt the global economy.

Shorter Duration

“If higher rates are a reflection that the economy is doing better, then you should be in more cyclical sectors,” Steinsland said. “Sectors and companies that are exposed to global growth. Losers from increasing rates will typically be real estate companies, which isn’t the best place to be. The banks may be a good place to be.”

The shock of Trump’s election win has turned the fixed-income market on its head, with the stock of negative-yielding debt dropping 23 percent since Oct. 31 amid speculation the Republican’s policies would flood the market with new Treasuries to pay for his projects.

With interest rates rising since the Nov. 8 election, Alfred Berg has shortened the duration in bond portfolios to position itself for higher returns, 55-year-old Steinsland said. A shorter duration means returns will be hurt relatively less when rates rise.

Nordic Market

The fund manager is also pushing for more Nordic mandates to improve diversification and liquidity for Norwegian bond investors. The fund Nordic Investment Grade has grown to 4.3 billion kroner ($500 million) less than a year after it was created.

Scandinavia “is a unique region in the world,” Steinsland said. “There’s political, economic and social stability. It’s a region where you wish to be invested. The last AAA region in the world.”

Broadening the investment universe to the whole Nordic region also means there are more officially rated companies to choose from. After the European Securities and Markets Authority decided that only registered rating companies, like Fitch, Moody’s and S&P, can give credit grades, banks and investors in the Nordic market are looking for new ways to define investment grade. The development promises to make life harder for Steinsland’s team of nine people.

“Now we must do more of this job ourselves,” he said. “To build models and set the shadow ratings oneself to verify that it’s a company that suits the mandate, will be an important part of the job. Therefore it will be important to have sufficient resources and knowledge to do that job.”

While Alfred Berg is prepared to adapt to new rules, there will still be several years with “enormous focus” on regulations, according to Steinsland.

“It’s almost a regulatory revolution at the moment,” he said. “There are massive changes for life insurers, pension funds and banks.”

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