Trésorier/Treasurer magazine - N°87 - Oct/Nov/Dec 2014 - (Page 28)

ONLINE WWW VERSION FORUM Our analysis reveals the impact of business, financial and monetary cycles on fixed income assets LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE - N°87 - OCT / NOV / DEC 2014 Unconstrained bond portfolios can outperform in all cycles, Candriam research shows New research from Candriam, the panEuropean asset manager, has shown that an unconstrained, cycle-aware approach to bond investing can offer more consistent returns than a traditional benchmark-aware approach. Impact of cycles on bond returns By analysing US economic and financial data over a 30-year period and constructing its own cycle-related leading indicators, we discovered how diverse different bond types can be in their response to changing cycles. Conversely, high-yield, convertible and, to a lesser extent, investmentgrade corporate bonds outperform during expansion of the business cycle and underperform during recessions. In our new report Riding the Cycles: * Contraction in the financial cycle Understanding business, financial and boosts returns for corporate bonds: Our analysis reveals By running econometric models on bond the impact of business, financial and monetary tend to undermonetary cycles in order to allocate while corporate bonds cycles on fixed income assetsdifferent cyclical phases, we fixed income, we argue that there is not returns over perform when levels of personal and Unconstrained bond portfolios can outperform in all cycles, our research shows one homogenous cycle, but rather three concluded that: corporate credit rise, they outperform interrelated cycles that all affect fixed as the economy deleverages. * The sensitivity of a bond's returns income performance in different ways: to changes in the business cycle is * Periods of monetary easing: signifiNew research from Candriam, the pan-European asset manager, has shown that an unconstrained, cyclepositively more consistent related to cantly increase returns * The business cycle, describing phases investing can offer and significantlyreturns than a traditional benchmark-aware on long-term, aware approach to bond its 'riskiness': fixed-rate government investment-grade and, to a lesser of economic expansion and contraction approach. bonds are clearly counter-cyclical extent, short-term bonds. * The financial cycle, relating the imIn our new report Riding (returns rising during recession and portance of credit and house prices tothe Cycles: Understanding business, financial and monetary cycles in order to allocate fixed income, we argue falling during expansion). that there is not one homogenous cycle, but rather three interrelated macro economics cycles that all affect fixed income performance in different ways: * The monetary cycle, reflecting the * The business cycle, describing phases of economic expansion and contraction interest-rate actions The financial cycle, relating the importance of credit and house prices to macro-economics undertaken by * central banks * The monetary cycle, reflecting the interest-rate actions undertaken by central banks Exhibit I: Evolution of the US Business, Financial and Monetary Cycles between 1980 and 2014 Sources: Candriam, Bloomberg 28 Impact of cycles on bond returns - -related http://www.atel.lu

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Trésorier/Treasurer magazine - N°87 - Oct/Nov/Dec 2014