Home / Fixed Income / The art of losing less, and why there’s beauty in the predictability of bonds

The key to employing defensive assets effectively, Burtenshaw explained, is knowing what it will do and how it will act. "If an asset isn't actually predictable, then it's hard to defend," he said.

While the utility of fixed income products like bonds as a defensive instrument has never been in question, the asset class has lost hold of its second major benefit in recent years – the ability to act as a non-correlative diversifier to equity asset classes.

It’s not like bonds disappeared from the defensive sleeves of portfolios. But the divergence of bonds from their traditional spot at the opposite end of the spectrum to equities has opened the door for many income-producing assets, including private debt and other defensive alternatives, to get a look-in with investment managers.

But that historical non-correlation between bonds and equities is starting to re-emerge, and with that comes a salient reminder from fixed income managers: bonds are at the heart of portfolio defence, but they need to be deployed with skill and discipline.

“I refer to it as the art of losing less,” said Ashley Burtenshaw (pictured, left), portfolio manager at Gryphon Capital Investments (A Barings company) at The Inside Network’s recent Investment Leaders Forum in New Zealand.

The key to employing defensive assets effectively, Burtenshaw explained, is knowing what it will do and how it will act. “If an asset isn’t actually predictable, then it’s hard to defend,” he said. “For it to be predictable, it’s got to have inherent margins of safety inbuilt.”

And while traditional sovereign bonds have wavered in their level of predictability in recent years, there are other defensive assets that are proving they can maintain consistency. The area Burtenshaw has most faith in, he explained, is the Residential Mortgage-Backed Security space.

“Securitised debt, for example, in Australia, is one of the most predictable classes out there in the fixed income space,” he said. “In the history of the asset class for RMBS, of the secured debt component, no bond has defaulted.”

What drives that predictability, he explained, was its construction. “The predictability comes from a well-organised investment structure, but it also comes from the considerable margins of safety built into this asset class. Alignment is required from both the borrowers and the issuer (or lender).”

Also on the session, Brandywine Global investment director Richard Rauch (pictured, right) didn’t shy away from the fact that bond returns have done it tough lately, especially compared to equities markets that have been charged by the big tech stocks.

“Bonds weren’t playing the role of income [and] they weren’t playing the role of diversifier,” he said. “And they certainly weren’t playing the role of total return.”

Bond markets almost had a “meltdown”, Rauch added, after three years of consecutive negative returns, before the fourth quarter of 2023 turned things around. Now, though, there is both a “cyclical and structural” case for fixed income. “The beauty of all this pain is that now we have some real potential gain,” he added.