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11 Dec 23 Insight Fixed Income Ardea Investment Management

What this bond investor is watching most closely into 2024

Author: Glenn Freeman - Livewire Markets

Fixed Income assets were the talk of financial markets last month when a change in tone from the US Federal Reserve sparked a historic rally in 2- and 10-year bond prices. These have pulled back since then but the bullish view on bonds has continued.

I recently asked Ardea Investment Management’s  for his outlook, thoughts on portfolio positioning, and other insights gleaned from his two decades of experience investing in global fixed income markets.

What indicators do you watch most closely?

“Risk diversification, always,” is Karunakaran’s unequivocal response. 

He emphasises a key difference between Ardea’s specialised investment approach and that of all other “conventional fixed income” lies in what his team ignores. Karunakaran explains that duration and credit are the two levers on which all conventional fixed income is based.

“The risk/return trade-off involves accumulating bonds to earn yield, in exchange for accepting duration and credit risks. The focus is largely on yield and getting directional market calls right,” Karunakaran says.

This high turnover relative value (RV) trading strategy uses highly liquid and investment-grade government bonds – typically rated triple-A or double-A – to profit from RV mis-pricing opportunities.

“These underlying market inefficiencies cause related securities with similar risk profiles to be priced inconsistently with one another. These trades combine into portfolios aiming to deliver low volatility returns that are independent of the level of yields, direction of rates, and broader market fluctuations,” Karunakaran says.

He singles out risk diversification as the key to doing this consistently over an extended period.