Tag Archives: Bonds

Emerging Markets Bonds performance when US rates rise

2018 was a tough year for bond investors. US Total Bond Market (represented by BND US ETF) returned -0.1% and Emerging Markets Bonds (represented by EMB US ETF) returned -5.5%.

Looking at last year’s returns, a logical question arose: what should we do with our exposure to Emerging Markets (EM) Bonds? Should we keep our allocation unchanged, reduce or eliminate it and replace it with US Treasuries?

The logical chain of thought dictates that investors require higher rates of return for higher levels of risk. If the FED is increasing rates, increased rates provide an option to have investments in safe government bonds with higher yields than before. It raises the required rate of return for taking higher risks, thus investors require higher yields on riskier assets for example EM bonds. It should also lead to a higher spread between EM Bonds and US Treasuries.

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Our weighted average return in February was -3.18%. Since 2015, we have generated a net return of +35.68% with a Sharpe ratio of 1.24.

In terms of investment strategy performance, our weighted average net returns for February were (a) -0.36% for conservative strategies, (b) -3.25% for balanced strategies, and (c)-4.37% for aggressive strategies.

February was a difficult month. January’s euphoria gave way to massive selling across all asset classes and served as a reminder that investing in capital markets is not easy.

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Our weighted average return in August was +1.28%, bringing our year-to-date return to +13.29%.

Going into August, we had reduced our positions in the technology sector. We did so because we had managed to make extraordinary profits in the sector this year, and decided to focus our efforts on less crowded trades.

As such, we continued to increase our positions in base metals miners. We find this sector attractive because it is wildly under-owned and has a minute weighting in the S&P 500 index (0.1%). As a new generation of investors dreams of start-up ‘unicorns’ and ‘mining’ virtual currency, we have been taking a decidedly ‘old school’ approach and buying quality mining companies that have emerged from cyclical lows with stronger balance sheets and are poised to benefit from global economic growth.

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Yields Are Rising

Yields on US 10 year Treasury notes are pushing upwards once again:

This is a good thing. Why? Because they are rising in response to better growth metrics in the US economy. But aren’t higher rates prohibitive to growth and investment? A some point yes. We are a long way away from that point – wherever it may be…

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How Major Asset Classes Performed In January

In a world inundated with terms like ‘alternate facts’ and ‘post truth’ we take comfort in numbers.

Our business is simple, you make money for your clients or you don’t. No amount of academic accreditations, algorithms or excuses can compensate for not making successful investment decisions (see ‘Long Term Capital Management’…).

Here is how major asset classes performed in January:

LINK: Major Asset Class Performance January 2017

And here is the performance of our top equity holdings:
top 10

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Emerging Market Bonds – Still an Attractive Asset Class

em bonds

The majority of our fixed income returns over the past number of years have come from Emerging Market bonds.

In the wake of Trump’s election victory, rising rate assumptions, a higher US dollar and a higher anticipated degree of trade protectionism led to a strong sell off in Emerging Market bonds. We took this sell-off as a buying opportunity.

The following link sums up our investment rationale quite well:

LINK: Fear Not Emerging Market Bonds

Although mark to market pricing and wider bid-ask spreads can lead to higher volatility in Emerging Market bonds, we have found that choosing healthy companies in the right sectors can generate outstanding risk adjusted returns for long term investors.

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Our November Results – The Game Has Changed


Last month was a very eventful month that saw drastic moves in all major asset classes.

Following Donald Trump’s victory in the US presidential elections, market sentiment changed not over weeks or months, but over hours and days. The vast majority of mainstream media and sell side analysts were dead wrong in their predictions – both in predicting who would win and in how financial markets would react if Trump won.

In the days that followed Trump’s victory, markets showed that investors are expecting heavy spending on infrastructure, tax cuts for both companies and individuals, and less onerous government regulations. As such, many sectors rallied strongly for several days, and all major US stock market indices reached new highs. It remains to be seen which of these policies are actually implemented and to what degree, but in the meantime it would be foolish to fight the tape.

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Global Bond Funds Suffer Worst Ever Meltdown – But We Feel Fine

Just over a month ago, we pointed out that the tide was turning on negative yields:

LINK: What Happened to Negative Yields?

The turning tide has become a tidal wave:

LINK: Bonds Suffer Worst Ever Meltdown

Here are the two month returns for the Vanguard Total Bond Market ETF (the most popular bond ETF: BND US), the US 10 year note, and the German 10 year bund:


Now, these are not cataclysmic draw downs, but the effect on investor psychology can not be discounted. Bonds have had a wonderful 30 year run, and bond funds have seen massive inflows. But nothing lasts forever, and market movements can become self fulfilling prophecies, especially when it comes to crowded trades. Losing money on bonds is not something that this generation of investors are used to, and outflows from bond funds will lead to forced selling, which will lead to further pressure on bond prices, which will lead to further bond fund redemptions, which will lead to… I think you get the point.

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