United Kingdom
Insight's absolute return bond strategy offers investors globally diversified exposure across the fixed income universe. Through its use of long and short positions it has the potential to provide investors with a positive return throughout the economic cycle. Here its portfolio managers Shaun Casey and Harvey Bradley answer questions on the strategy.
What is the most common objective of investors in the strategy?
Our investors are generally seeking consistent returns over and above what they would have received from cash, without the risk of material drawdowns if markets turn sour.
We focus on capital preservation and liquidity, as the strategy is often used within enhanced cash allocations. Having ready access to cash and near-cash assets is an important aspect as it means our investors can be confident in the strategy’s liquidity.
How does it differ to other absolute return strategies?
Unlike some of our peers we don’t take any structural positions in interest rate or credit risk. While taking such positions is generally yield accretive compared to being invested in cash, it does expose the strategy to potential downside risk if markets perform poorly, with 2022 as a prime example.
By avoiding such structural positions, the strategy is much less correlated with broader market moves and allows greater consistency in generating our alpha target regardless of the market backdrop.
Additionally, while higher returns may be available if you’re willing to take positions in less liquid instruments, such as private credit or direct real estate, we don’t feel they’re appropriate for what should be a highly liquid daily-dealing strategy.
How successful has the strategy been in reducing downside volatility over the past 20 years?
Over the past 10 years the strategy has reduced downside volatility with only one calendar year of negative returns in 2018.
Notably, the strategy performed well in both 2020 and 2022 despite significant challenges for both risky and risk-free assets in those two years.
How is the strategy currently positioned to minimise volatility?
The majority of the active risk we’re currently taking is in the form of relative-value trades across correlated assets rather than large outright long or short positions in either interest rate or credit risk. These relative-value relationships, in our experience, generally exhibit lower volatility than outright directional trades, particularly in periods of market stress.
Additionally, given some medium-term concerns over the state of the global economy, we are very lightly positioned in lower quality, higher-yielding credit assets as we feel those areas of markets could be vulnerable if economic performance disappoints.
Fund characteristics
Table 1: Volatility1
| Average return (pa) 2006-2023 % | Volatility (5yr) | |
| Insight's absolute return bond strategy | 3.18 | 2.5 |
| UK gilts (all maturities) | 2.63 | 8.1 |
| Euro government (all maturities) | 2.54 | 5.3 |
| Global credit | 3.82 | 7.1 |
Source: Insight, Bank of America Merrill Lynch indices: All Maturities UK Gilt index (GAL0), European Government (EG00) and ICE Global Corporate index (G0BC) as at 30 June 2024.
Table 2: Asset allocation2
| Investment grade bonds | 43.2% |
| Government bonds | 29.5% |
| Asset backed securities | 5.7% |
| Emerging market debt | 6.0% |
| Loans | 5.7% |
| High yield debt | 3.1% |
| Credit default swaps | 13.7% |
Source: As at 30 September 2024. Cash-like assets are represented by Treasury bills, short dated ABS and floating rate notes.
