Banca del Sempione: how to guide the creation of value

Giorgio Bertoli, recent years have put the patience of bond investors to the test, who in many cases have obtained negative returns on their capital over multi-year time periods. Will the return of positive interest rates be enough to restore confidence in the asset class?

«There is no doubt that we are returning from a particularly negative decade for bond investing; such poor performance they are not easily found even in the remote past. The cause of this result is often attributed, in our opinion erroneously, to the sudden increase in inflation at a global level in the years following the pandemic. In reality, the main reason for the lack of returns is attributable to the zero or negative interest rate policy maintained for many years by the central banks. Investors were induced to use their capital on the bond market at zero returns, exposing themselves to numerous risks without any remuneration. The arrival of inflation simply made the inadequacy of such investments clear, causing rapid and painful losses. The end of the negative rate policy opens up prospects of a finally normalized context for the bond market, even if the level of rates, especially in Swiss francs, still does not guarantee too satisfactory returns".

How does the role of active bond management change in this new context?

«We believe that the underlying philosophy of our products should not change; what is changed are the underlying strategies and investments, not the objectives and methodological approach. The mentality must be oriented towards creating long-term value for the customer, who must have tangible benefits from investing in the product compared with a simple "buy&hold" approach on individual bonds. The example of negative rates from this point of view is emblematic: in the short term many investors have found it convenient to take many risks in order to have a small annual positive return, but by doing so they have exposed themselves to high losses during 2022. Think about the long term can also mean knowing how to give up something immediately to plan a portfolio structure that can generate value over time".

On a practical level, how has this methodology been translated?

«The Flexible Low Risk Exposure fund of BASE Investments SICAV managed to offer positive returns to the investor, combining a bond portfolio with a macro total return asset. These positive returns in the medium and long term, combined with controlled volatility, have led the sector to win important awards over the years including the Lipper Fund Award Switzerland and Europe and the High Yield Award, the last time for the results of the 2023 but the recognitions began in 2015.

Returning to the methodology used in terms of stock selection, despite a context of very low returns, various opportunities have been created over the years; in fact, there has been no shortage of episodes that have generated volatility on the markets and made it possible to purchase corporate bonds at attractive prices. We believe that the fixed income market has structural inefficiencies, due to illiquidity or periodic irrationality on the part of operators, which allow investors with rapid decision-making processes to exploit certain windows of opportunity to purchase securities at convenient prices. Given this security selection activity, we were aware that overall returns were too low and unsustainable over time: we therefore combined the portfolio with a large amount of protection from duration risk which, although causing some temporary periods of difficult management, made it possible to protect investors' capital from the great correction of 2022."

What are the future prospects of the bond market?

«We are going through a period of total uncertainty from a macroeconomic point of view, to the point that even the main central banks have admitted that they can rely little on their traditional econometric models. Changes in government policies, demographic dynamics and technological innovation are substantially changing the nature of the economy and the labor market. One of the few things that seems certain is that the long period of negative rates has come to an end, which is undoubtedly positive for bond investors. We expect inflation and rates, beyond short-term volatility, to remain higher on average than in the 2010-2020 decade, but the value generation processes illustrated previously remain valid in this context too. One factor we monitor carefully is the use of high fiscal deficits by the world's major governments; a possible moderation of these deficits could be an important tactical buying signal. We also like the bond asset class because, although it is unable to compete with the returns of the stock market in good years like 2023, it may be able to offer positive returns both in scenarios of economic growth and in recessionary contexts (which would be instead penalizing for many risk assets), thus making it very suitable for investors with medium-low risk tolerance".

The geopolitical factor is monopolizing media attention. How does this component fit into your management choices?

«The weight of geopolitical events is undoubtedly growing, which is why we dedicate more time and resources to the analysis of these phenomena. We live in a world where the flow of information is overabundant, especially on geopolitical issues and issues of collective interest, with the risk of creating confusion. The selection of credible sources of information is the starting point, which must be followed by an analysis that must be as objective and detached as possible. Our opinion is that we tend to overestimate the impact of many events, such as some political declarations, and underestimate the underlying trends that characterize the action of the main countries, and which reverberate in the medium to long term. Identify these trends, without being excessively influenced by them newsflow daily, is the main task. Some of the current underlying trends (recession of globalization, increase in armed conflicts, preference of public opinions towards high-spending policies) make us think that inflation will remain structurally higher than the last decade, but at the same time it will have to be accompanied by real rates that are not too high to finance large public debts. However, flexibility and the ability to adapt remain vital in product management, given the unpredictability of some events which cannot be easily anticipated even by the most trained analyst."