ING Looks Abroad for Bond Returns (Part 2)
This is the second of a six-part series profiling ING Investment Management’s bond business.
ING seeks to balance its investment approach between top-down and bottom-up, Christine Hurtsellers and Matt Toms told Markets Media.
“We spend a lot of time analyzing key global macro data — industrial production, central bank activity, etc.,” CIO Hurtsellers said. “We spend a lot of time thinking about where we are in terms of the business cycle itself and valuations, and how that affects different sectors.”
One notable development in recent years amid increasingly interconnected markets is that seemingly local events can affect asset prices globally, said Hurtsellers, who headed ING’s structured-finance group from 2005 to 2008 before ascending to her current role in early 2009. ING’s fixed-income team is well set-up to handle the market dynamic, she said.
“Our different asset teams are critical in informing the feedback loop about the opportunities in various markets and what has been priced in,” Hurtsellers said. “Our investment team is very flat and very interactive in terms of people having their say in investment decisions and dialogue.”
In Hurtsellers’ view, lingering economic weakness is enough for the U.S. Federal Reserve to keep interest rates very low “for a while.” That would set a yield ceiling of about 3% for 10-year Treasuries and 0.5% for two-year Treasuries.
“That said, it’s a fool’s game to predict interest rates, and the market is emotional,” Hurtsellers said. “In the fall, everyone thought the world was going to end. Now, people are saying GDP could be north of 3% this year, so everything is great. But everything isn’t great.”
Specifically, Hurtsellers’ concerns about developed-market political risk were brought to light in the third quarter of 2011, when a rancorous legislative debate regarding the U.S. Treasury debt ceiling touched off a market swoon and resulted in only a stop-gap fix. The upcoming presidential election has the potential to reignite the debate.
“We had a very bad experience with the Treasury debt-ceiling debate last summer,” Hurtsellers said. “And if you start to look at the math — in terms of payroll tax cuts, the Bush tax cuts, etc. — there’s a real fiscal headwind facing the U.S. and our GDP growth. We’re kind of at an inflection point, as I don’t know if we can get any more meaningful improvement in unemployment without some pretty nice nominal GDP growth.”
Political risk can be especially vexing for investment managers because of the capricious nature of government leaders. For instance, Hurtsellers worries that a sudden resolve to tackle the U.S. deficit could result in too-quick action and cut off the economic recovery.
Amid the qualms about the market’s direction, “we’ve started taking some risk off the table and have been managing duration carefully,” Hurtsellers said. “But we’re still looking for opportunities.”
Within fixed income, Toms said the emerging-market and high-yield sectors hold appeal, while Treasuries, Treasury Inflation-Protected Securities (TIPS) and short-dated corporate bonds have run up considerably and are less promising. Toms is ING’s head of U.S. public fixed-income investments.
ING’s Core Plus Fixed Income’s investment mandate allows for as much as 20% in emerging-market and high-yield debt, combined. As of December 31, 2011, Core Plus Fixed Income held 46% AAA-rated securities, compared with 75% for the benchmark Barclays Capital U.S. Aggregate Bond Index. Bonds rated below BBB, considered high yield, and unrated bonds comprised 15.2% of ING Core Plus; the BarCap benchmark had nothing below BBB.