The Federal Reserve’s decision to hold rates in May came as little surprise, however its bullish stance on US growth prospects flies in the face of slowing inflation and an annual growth rate of 0.7%. This has resulted in the expectation of another rate rise in June climbing from 67% before the announcement to 94% in the immediate aftermath.
The big question is: how prepared are fixed income managers?
In building Citywire’s database of around 15,000 portfolio managers around the world, we collect all sorts of information on managers, including their date of birth and the year in which they started running money. Both of which are pertinent to the question above.
The graph below charts the yield on the 10-year treasury for as far back as we can go. The pivot in September 1981 and the start of the early 1980s recession in the US is striking. For nearly 30 years prior to this point, the last place you would have wanted to park your money was in fixed interest, even less so following the oil crisis in the early 1970s.
But, the following years have been plain sailing for anyone with a long enough investment horizon. The golden age of fixed interest investing has lasted for more than 35 years – an astonishing run.
Yields of a lifetime
Sign of the times
However, when we overlay what we know about fund managers’ ages and tenures, it tells us a lot about their experiences. The average fixed income manager is 45 years of age and born in the summer of 1972.
When the Fed started contracting its monetary policy in an effort to boost growth rates in 1981’s stagnating economy, the average age of today’s fixed income manager was just nine years old. When they got their first job, 12 years later, yields were just shy of 10%. The average tenure of a fixed interest manager is just a little over seven years. This means that on average, they were not running retail money during the credit crisis.
If behavioral finance has taught us anything, it is that we are a product of our experiences. All the average fixed income manager has ever truly experienced is a world in which implied interest rates have tumbled from all-time highs to the historical lows we have today. Does that fill you with confidence that they are prepared for a persistent rate rising environment?
That’s not to say there aren’t managers who weren’t around on the other side, but they are the exception and not the norm. Loomis Sayles Dan Fuss’s comments about needing to be cautious might well be heeded by those with less experience on their side.