Jupiter: An all-weather strategy for a tough macro environment

We adopted a “risk-on” in 2013 on the view that central banks and policy makers would backstop markets. This was expressed through a large weighting in high yield bonds. As the year progressed, we took steps to help protect the fund from a potential change in Fed policy. A lot of our interest rate exposure was hedged by shorting short-dated US Treasuries, for example, and by the end of the period we had about a third of the fund invested in floating rate notes. European corporate bonds presented some of the best opportunities for the fund during the period. 

Growth in the world economy remained lacklustre as the financial year began. Despite an unprecedented cycle of monetary easing by the world’s central banks since the financial crisis, inflation in many of the world’s major economies hovered close to zero. The first quarter of 2016 brought a sharp sell-off across financial markets on concerns over global growth and the plunging oil price. The shock Brexit vote in June roiled financial markets. The volatility proved short-lived, however, as the world’s central banks stepped in to steady markets after this latest shock.  

The positions in the fund which were designed to mitigate downside risk – such as US Treasuries, Australian government bonds and gold-related convertible bonds performed well at times of negative market sentiment, such as the sharp sell-offs at the start of 2016 and following the UK referendum result in June. This enabled the fund to perform competitively in a volatile period for risk assets. Our cautious approach when selecting corporate bonds also assisted performance.  

Global stocks and corporate bonds plummeted in early 2020 on concerns that the Covid-19 pandemic would plunge the global economy into a severe recession. The sell-off gathered pace throughout March as there was growing recognition that the outbreak was spreading beyond China. Global equity markets fell into bear territory (defined as a drop of at least 20% from a recent peak) while government bond yields fell to all-time lows. Central banks and governments reacted swiftly, announcing monetary easing and massive fiscal stimulus packages. Rallies in stocks and corporate bond markets followed in the second and third quarters of 2020 as sentiment lifted. Markets turned more sombre, and inflation hopes somewhat faded in September as the scale of economic damage caused by the pandemic became clear.  

Going into 2020, we were concerned that markets were vastly underestimating risks to the outlook, given the weakness of global economic activity combined with rich valuations in credit. The fund entered the exceptional crisis that began in March with defensive positioning: about 40% of the fund was invested in AAA-rated sovereign bonds, such as US Treasuries. Before the March crisis hit, the fund held 10% in shorts on US and European high yield markets expressed through credit default swaps. As the credit spreads ballooned in March, these hedges were unwound, contributing positively to the fund’s performance. The market’s weakness was used to buy high quality investment grade credit with resilient top and bottom lines. This included bonds from the likes of McDonalds and AB InBev and adding to our position in Tesco – nicknamed our ‘beer and burgers’ theme. Within high yield, we stuck to adding defensive senior secured debt and BB-rated bonds. Emerging market debt was cut as commodity prices fell, the dollar rallied, global growth slowed and tourism slumped. The defensive allocation, particularly in AAA-rated government bonds, stood us in good stead as other markets stumbled. 

The fund faced some headwinds due to a toxic combination of high inflation and slowing growth. We had expected inflation to rollover quickly in 2022 but Russia’s invasion of Ukraine pushed up energy and commodities costs, clouding the picture. Yields rose as policy makers began to withdraw the extraordinary monetary and fiscal accommodation introduced to prop up the Covid-19 battered global economy. Global central banks also started to aggressively increase interest rates to cool inflation. But there are some encouraging signs for fixed income investors. Prices of commodities, including metals and agricultural products, have started to decline from mid-2022. A number of data points in the US and Europe show signs of slowing growth. We expect the Fed to review its hawkish bias later this year, which could trigger a rally in government bonds.