‘Our eco­nomics de­grees have been to­tally use­less’

The Daily Telegraph - Your Money - - FRONT PAGE -

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’

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