Investors continue to underestimate the risks of investing in sovereign debt in the ‘new normal’ economic environment and remain over-exposed to their domestic markets, according to GLG Partners, a hedge-fund unit of Man Group Plc.
Jon Mawby, manager of the GLG Strategic Bond Fund, said despite media attention on bond valuations and talk of a ‘Great Rotation’ out of fixed income, investors are yet to fully grasp the risks of investing in sovereign debt, "particularly that of the traditional safe haven countries".
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"Investors are simply not used to having to think about sovereign debt dynamics in this ‘new normal’ environment and are probably underestimating the risks involved. They need to consider that previous safe havens have increasingly precarious fiscal balances that could lead to more ratings pressure whilst emerging market countries that were perceived as riskier investments are on improving growth and ratings trajectories," he said.
Mawby said investors should also focus more on the relationship between fundamental strength and value, and consider funds that adopt a dynamic asset allocation process across asset classes, sectors and geographies.
According to Mawby, this change of approach has only occurred on a limited scale both on an investor level and in terms of funds that claim to be global but are often skewed towards their domestic market.
Moreover, Mawby said, historically, globally diversified portfolios have tended to deliver a superior return per unit of risk than geographically focused funds; a trend he expects to continue "even in today’s interconnected economic environment".
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