What Do You Think?

To a lot of your clients are over-invested in traditional fixed income, in the opinion of William Eigen, JPMorgan Asset Management’s director of absolute return strategies and portfolio manager of the JPM Strategic Income Opportunities Fund. Fixed income funds really haven’t changed in 30 years, said Eigen. Their managers still rely on changes on rates of interest to make money basically.

In contrast, he said, managers of equities have powered the development of hedge funds. Fixed income hasn’t evolved because rates of interest have been falling for 30 years, said Eigen. Quite simply, with falling rates driving capital appreciation, there was no need for new techniques. Can you imagine, Eigen asked, what could have happened to stock funds if the Standard & Poor’s 500 had gone directly for thirty years?

Clearly he believes this might have stifled development in the management of stocks and shares. Instead, the stock market’s fluctuations spurred the imagination. Traditional set income performed pretty much okay for thirty years, with some rocky years occasionally. However, the interest-rate decline that drove bonds’ long-term positive performance will end.

Indeed, Eigen handled traditional bond funds during his 12-season profession at Fidelity Investments. He still left because he sensed he couldn’t protect his investors’ capital sufficiently under the restrictions of the traditional relationship trading. Eigen. He wanted to be able to short-sell and put on relative value investments using synthetic instruments. It’s important to earn positive results in fixed income by firmly taking benefits of factors other than falling interest levels. If not, asked Eigen, what happens whenever a long-term craze of rising interest rates takes hold? If you’re familiar with the concepts of duration, you know that relationship prices fall when rates of interest rise.

Another negative: With interest rates at historic lows, there’s no “coupon cushioning” of attractive interest rates to help ease the pain of relationship investors. It’s easy to see the appeal of short-selling bonds in an increasing interest-rate scenario. Investors would gain essentially gambling on relationship prices’ decrease. Now Eigen can take advantage of short-selling as manager of the JPM Strategic Income Opportunities Fund, a long-short comparative value fund that does not use leverage. The fund can use synthetic instruments. Additionally, it may keep cash because Eigen’s priority is never to lose cash.

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That’s challenging for which cash is sometimes the only solution. The finance is managed as an absolute-return account with a focus on of t-bills plus 2%-8%. “You do not need duration to create solid, fixed income profits,” Eigen said. Another potential advantage of his approach: it has “zero correlation to traditional set income,” Eigen said. Eigen thinks rates of interest could rise faster than most pundits expect.

Investors could easily get frightened once rates start rising. Then they might bail out of bonds to cut their deficits quickly. Eigen is also scared about sovereign risk. Look at what’s happened in Europe and Dubai, he said. His finance is taking benefit of that on the short side. Synthetic instruments such as credit default swaps are a sensible way to take advantage of the comparative value opportunities that arise in times of low volatility in relationship markets. For instance, investors seem to perceive a solid company such as Berkshire Hathaway as on a par with minimal insurance companies. Synthetic equipment is the only economical way to invest in this disparity sometimes. What do you consider? Maybe the end near for typically handled fixed income funds–or have they still got some full life left in them?

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