The star fund manager cannot win every battle, and this sentence has been confirmed again in the past month. Manager X is a well-known fund manager in the industry, managing corporate bond funds. During his tenure, he successfully seized different opportunities and brought rich returns to investors. However, things have changed in the past year.
Argentine bond crisis
The Argentine presidential first election had unexpected results, and the opposition won, and it is highly likely to win in the second round of voting. The market is worried that Argentina will return to the political environment before 2015, and local bonds have plummeted. The Argentine government immediately restarted capital controls and delayed repayment of bonds, further triggering market worries. At present, the Argentine government has begun negotiations with the IMF to change the conditions for the previous issuance of debt.
Emerging market bond assets recorded a sharp decline due to the crisis. Since Argentine bonds were included in the main bond index, most fund managers failed to escape this round of decline. Manager X overweighed in Argentine bonds, and the losses were even more devastating. Among them, a fund he manages holds more than 10% of Argentina’s bond positions, and his net asset value has dropped significantly.
Short duration drag performance
Manager X and his team have been bearish on the bond duration. From their media interviews, they believe that the Fed is too concerned about the external environment and ignores inflationary pressures in the United States. However, the market did not follow Manager X’s forecast direction. Year-to-date, the Fed turned to doves and started to cut interest rates, all pushing up bond prices. It’s not surprising that Manager X’s fund’s performance is lower than the benchmark index and peers.
Chasing star manager is not a rational choice. The higher degree of freedom allows Manager X to deploy in bonds and currencies in different regions and countries to achieve excess returns. The probability of success of these strategies is not necessarily consistent, and investors must understand the source of risk for the fund to seek excess returns.
Excessive concentration is a nightmare for investment. If the bet is right, the centralized position can bring more benefits. However, investors need to pay attention to risk management. Asset diversification is the easiest way to manage risk. Therefore, in asset allocation, investors need to pay attention to whether their assets are excessively concentrated.
Finally, holding non-mainstream (strategic opposite to market views) assets may lead to pain and loneliness. However, the fund is not related to the mainstream bond index, or even negatively correlated, which means that it is an investment tool that enjoy diversification effect.