‘Our economics degrees have been totally useless’
Bond investors have enjoyed share-like returns with less risk over the past decade. But interest rate rises in Britain and America pose a threat to bond prices as cash becomes a more attractive alternative.
In anticipation, many bond fund managers are focusing on “shortduration” bonds, which are closer to maturity and therefore less sensitive to changes in interest rates.
John Pattullo, alongside comanager Jenna Barnard, manages the £2bn Janus Henderson Strategic Bond fund, and is doing the opposite.
He tells Telegraph Money why he thinks traditional economics no longer works and why he doesn’t believe significant inflation is ahead. its financial crisis, and we have applied that philosophy to Europe. That’s a fancy way of saying we don’t think the world is going to grow very much or have much inflation.
That’s completely against the mainstream traditional economic thinking of economies growing too fast, inflation coming and interest rates going up – which is exactly what has not happened.
First, since the crisis, behaviour has changed regarding debt and spending. In Japan, lowering interest rates did nothing, as people wanted to pay off debts, not borrow and spend.
Second, the “baby-boomers” are retiring and don’t spend much. Millennials prefer to share and rent, rather than own, which reduces demand for goods.
Third, technological disruption from companies such as Amazon is
CV: John Pattullo
John Pattullo ttullo joined Henderson in 1997 after spending ng four years working orking as a chartered rtered accountant. tant.
He is co-head of strategic egic fixed income at the firm, and over 10 years has significantly outperformed his peers. pushing prices down. In America and Europe inflation has repeatedly disappointed [by remaining low], and it has increased in the UK only because the pound has fallen and increased the cost of imported goods.
We think those three long-term forces will dominate the majority of the time.
At present the world is growing quite well, but without inflation.
Henderson’s John Pattullo tells James Connington why investors who expect higher inflation are getting it wrong
The big picture is important, as it gets you in the right ballpark. If you get that wrong, it doesn’t matter which companies you pick.
Our view is that you want to own bonds and have a bias towards longerduration bonds – these are more volatile, meaning that if their yield falls, the price goes up more. If you think more inflation is coming, you don’t want any bonds.
The fund is skewed towards mobile phones, cable television, tobacco, consumer goods and packaging – the duller and more reliable industries. We have a big bias towards larger businesses. Smaller companies have higher default rates and lower recov recovery rates.
We avoid businesses that are too econ economically sensitive, too small, or tha that don’t have a differentiated produ product or service. We avoid sectors such as car makers, airlines, oil and steel.
Ro Roughly 20pc of the fund is in the debt of companies such as Microsoft and A Amazon. We think they will be aroun around in 20 years, whereas we don’t think companies like House of Fraser will b be.
An Another business we like is SCI, America’s largest cremation and funeral service company. It is cashgenerative and stable, and has three years of sales in the bank as people pre-pay their own funerals. I don’t know many other businesses with that. Jenna has done a lot of work on Australia. It hasn’t had a recession for 26 years and we think it is yet to have its slowdown or shock.
Amazon is also moving into the country and will shake up the economy in a big way.
We have been buying Australian government bonds as we don’t think they will be raising rates, and may be cutting them, so it’s not unreasonable to suggest that their bond yields may fall in three to five years, pushing the price of the bonds up. I have about 10pc of my Sipp in Janus Henderson funds.
A mixture of salary and a discretionary bonus, based on performance and growing assets under management. Iron Mountain is a US-listed business based in Boston (pictured), with a $10bn (£7.4bn) market value. It provides document storage and archiving services globally and is growing slowly but steadily over the long term.
It’s a big global company, operating in 52 countries, with 40pc of its business in Europe, 40pc in America and 20pc in Asia.
Clients phone the company up and it collects the documents, then stores them safely. One of its boxes costs $3 a year, and the average box is in its depot for 15 years. When a client wants the documents again, it delivers them back.
A lot of clients forget they even have boxes that they’re paying for and Iron Mountain retains 98pc of customers. That’s a pretty safe business. It is servicing 230,000 customers, including 95pc of America’s largest companies, with no single customer accounting for more than 1pc of its revenue. Thanks to regulatory requirements to store documents boosting demand, it enjoys organic revenue growth of around 2pc a year. The company still sees a large opportunity in developed markets such as North America, plus higher growth opportunities in emerging markets. It is also now moving into electronic data storage and online storage in the “cloud”. As part of this, the company is currently looking to issue $825m in new bonds, maturing in 2028, to part-fund the purchase of new US data centres. The rest of the funding will come from issuing shares, which we are encouraged by.
www.telegraph.co.uk/funds ‘ IT’S SLOW AND STEADY’