Coming up to the present time, where does Syms currently see the strongest value in bond markets?
Firstly, taking a step back, Syms reminds us that when it comes to ETFs “You can get very accurate real time data on what clients are doing. We could actually see the way our clients were navigating the pandemic last year and just the whole change of psychology through the year and as we’re coming out the other side now.
“Last year, we saw effectively a ‘flight to quality’ play as the initial Covid reaction was to sell high yield in emerging market debt and buy developed markets, government debt, U.S. Treasuries, Gilts etc. As we moved into 2021, we’ve seen the ‘flight to quality’ has really moved into a search for yield. I think people are generally looking a little bit more positively at the global outlook now.
“Developed markets, government and investment grade debt yields are still pretty much on the floor – close to record low levels. From that perspective, if you’re looking at a more buoyant economy, duration risk doesn’t look particularly good at the moment. You don’t necessarily want to have high interest rate risk, because as we hopefully continue to come out of this pandemic, central bank, support is going to decline over time. There’ll be tapering from the Fed and maybe even rate hikes at some point in the future. But they’re being fairly dovish at the moment.
“One area we’re seeing interest in is subordinated debt. Another is municipal debt, although you really have to look at this in the last election cycle. Municipal bonds performed very well compared to treasuries and investment grade in dollars. And it seems that the as the economy reopens the positive economic environment is actually positive for municipal credit. So, the bonds perform relatively well to other sectors.”
“Another very popular theme that we’re seeing now is ESG growth within the fixed income space. Municipal bonds are a good area to look at from an ESG perspective. It is difficult to pin them down specifically because a lot of the ESG ratings agencies don’t give them an explicit rating for their ESG criteria. But they are used to finance a lot of projects that most people would see as beneficial to the community, whether it’s building hospitals or providing health care or funding schools or libraries.
What would Syms say to investors who say if they want passive exposure they can invest directly into bonds and save on the ETF fees?
“I’d say that when you’re looking at investing in a pooled vehicle there is always a fee associated with doing so. However, whilst a lot of asset managers can invest directly in bonds, there are a few factors that they should take into consideration. Probably the most obvious is diversification. Bonds have minimum trading sizes, and the bond indices tend to be quite complex, with lots of issues in there. So they’re quite hard to replicate. Unless you’re a very large investor, it’s quite hard to get a truly diversified portfolio. Through an ETF, you can get that very diversified exposure with just one trade.
“Secondly it’s about the total cost of ownership. You have to look at the fees that an ETF is charging relative to how much it would cost you to buy into all those individual bonds. Bonds trade over the counter (OTC), so by their nature they tend to be less liquid than products that trade on exchange. The secondary market isn’t always as transparent as you’d like it to be. Direct investors need to work out whether they are able to access the markets that a large asset manager like Invesco can. As a £1.4tn asset manager we have top tier relationships with all of our counterparties. This means we have great access to markets. For smaller asset managers, overall costs may well be higher than the costs of the ETF itself.
“Other advantages include the granularity side of ETFs, whether it’s maturity, maturation, access to niche areas, there may be areas you don’t actually have the expertise in yourself. There are many advantages for the bond ETF relative to direct investment.”
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