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The Great Rotation – from bonds to absolute return

Fund selectors expect an annual return of less than 2% from their bond portfolios over the next five years. The Great Rotation is therefore finally happening. However, it’s not from bonds to equities, but to absolute return.


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More than 70% of the 75 fund buyers gathered in Rome at Expert Investor’s Pan-European Congress last week settle for a fixed income return below 2% for the coming years, with most if not all of that to come from higher-yielding bonds. Hopes are significantly higher on the equity side, though fund selectors do not expect a repeat of the double-digit returns seen in recent years. Just 4% of them forecast returns above 9%. The large majority believes annual returns between 3 and 9% are realistic.

Long/short equity rules

Though the outcome of the poll is, admittedly, not surprising, it shows the need for investors with large bond allocations to diversify. And that’s what they intend to do. However, it’s not so much by increasing their strategic allocations to equities. As our asset allocation survey conducted at the Congress shows, delegates intend to replace part of their fixed income holdings with absolute return funds. These are expected to deliver slightly higher returns than bonds, but with a similar risk profile.



As you can also read in the March edition of the Expert Investor magazine, the most popular absolute return strategy of the moment is long/short equities. Some 61% of delegates, who came from all over Europe, said they will increase their exposure to such funds. They will fund these increases by selling off investment grade bonds. For both corporate and government bonds, those intending to sell significantly outnumber those planning to buy.

Forced into absolute return

Jaap Bouma, senior portfolio manager at Optimix, a Dutch wealth manager, is one of these investors who has been shuffling part of his bond exposure to absolute return funds. “Over the past year, we have been building an absolute return portfolio,” he says. “Now it’s 8% of the total portfolio, but we want to increase that further.”



At the moment, Optimix uses a volatility arbitrage strategy and two long/short market-neutral equity funds. One of these is the F&C Global Equity Market Neutral Strategy, managed by Erik Rubingh of BMO Global Asset Management. Despite its market-neutral mandate, it has returned more than 25% since inception in September 2014. “In fact, the strategy has a stronger correlation to bonds than to equities,” says Bouma.

Despite his initial satisfaction with the funds he has picked, Bouma’s engagement with absolute return remains more a marriage of convenience than one of conviction. “We invest in absolute return because we are forced to due to the low bond yields,” he admits. “We will return to bonds when we get a realistic return there, though we expect that will take at least a couple of years.”

So for the foreseeable future, absolute return is likely to remain hot. But keep a close eye on our website so you will spot in time when the trend turns.