Bonds are back, says Allspring chief

George Bory, chief fixed income strategist at Allspring Global Investments, says fixed income is once again a welcome component in investors' portfolios as they look to diversify away from volatile equities

Having studied at the prestigious London School of Economics, in what he describes as a “formative experience” of his life, George Bory, chief fixed income strategist at Allspring Global Investments, particularly enjoys the London leg of his annual “Grand Tour” of Europe’s financial hubs, also taking in Zurich, Frankfurt and Milan.

Speaking from the US group’s UK office, overlooking Bread Street, close to St Paul’s Cathedral, he enthuses about the return to favour of his beloved asset class, following dramatic rises in interest rates, yields and income streams. “Globally, we are seeing mid or high, single-digit returns and those numbers are starting to look very compelling,” says the bonds boss, combining an obvious delight with his more cautious nature.

For Mr Bory and the broader Allspring project, headquartered in Charlotte, North Carolina, the success of fixed income is an existential question. Of the $465bn managed by the group, $380bn is invested in bonds, with $66bn in equity strategies and the balance managed under the “solutions” unit.

“If you can compound your portfolio at 6 per cent a year in perpetuity, you typically beat inflation over time by 2 or 300 basis points and you are able to absorb a significant amount of volatility over time,” he calculates.

Recalling Zoom meetings with clients during the “dark days” at the height of the Covid-19 pandemic, when fixed income slipped to a marginalised and ridiculed asset class, Mr Bory says he expected bonds to make a comeback.

Rock bottom

“I always reminded people that a bond offers a predictable stream of cash flows, which become very useful if matched up against longer-term investing horizons and spending patterns,” he says. “If you look back over long periods of time, 90 per cent of the return from bonds comes from the income component. When this income was rock bottom or negative, like in the last couple of years, it became hard to make that value argument.”

But since last year’s “inflection point,” when gas prices peaked after Russia’s invasion of Ukraine and “the fear of never-ending inflation” began to recede, Mr Bory once more became a welcome visitor in the corridors of Europe’s private banks, pension schemes and family offices, as they looked to diversify exposure away from volatile equities.

“The macro backdrop is almost 180 degrees away from one year ago, it is the polar opposite from what we saw then,” he recalls. “Inflation is falling and central banks’ policy is tight. This is a world very favourable to fixed income securities.”

Assets recommended by Allspring in this climate include energy companies, starting with oil and gas, rotating towards green energy as alternative sources begin to attract investment. Financials are also favoured, with assets taking on an increasingly international hue.

Esoteric assets

“Our portfolios are multi-currency in scope, so we are trying to capitalise on global flows as a key part of the investment process,” says Mr Bory, who during his travels, notices more demand from European families for esoteric US assets, including municipal bonds. “As an asset class, the ‘muni’ market tends to outperform in a rising and high rate environment, due to structural demand from US buyers for tax-exempt securities,” he notes. “But more importantly, you get cyclical diversification from investing in states and municipalities, relative to traditional corporate debt. So it’s really that diversification benefit we find is more appealing to non-US domestic investors.”

With a “marked increase” in appetite from Europe, his investment teams – comprised of 160 portfolio managers, analysts and traders - are adapting this “mainstay strategy” for subscription in territories further afield.

Upgrading its European network, the firm promises to add more “senior distribution talent” across offices in France, Germany, Italy, Luxembourg and the UK, to compliment recent hires. Allspring recently opened a Hong Kong office, following last year’s Singapore launch, on the understanding that many Asian investors are still “materially underweight” fixed income.

Previously part of US bank Wells Fargo until it was relaunched as an independent firm in late 2021 by its private equity buyers, who paid more than $2bn for a business then generating annual revenues of $1bn, Allspring has focused on serving a broader audience across an expanding network of offices in Europe and Asia. It still has some distance to cover, as it chases its $600bn pre-sale managed assets figure.

Today’s environment, believes Mr Bory, is positive for investment managers and private banks with a “bottom-up portfolio construction process”, rather than those dominated by a top-down structure. “Fifty per cent of our typical excess return comes from securities selection, plus some sector allocation. We are taking a lot of individual decisions, rather than one big macro view. Diversification, we think, creates better, long-term replicable returns. This is what underpins our investment process.”

Private problems

Yet the conversation with clients also includes controversial undertones, with Mr Bory taking the opportunity to point out the private assets they all once treasured may be losing their lustre, now that his bonds are able to do their job once more.

“We heard the ‘there is no alternative’ to private assets mantra in the market during last year, but today there is an alternative to private assets when your bond yield is 4 to 6 to 8, maybe even as high as 10 per cent,” he says warming to his theme.

“You don’t have to be in private markets or deeply-subordinated securities anymore. It really comes down to volatility and liquidity. In a higher volatility market, publicly traded securities now offer the income and yield that all those highly illiquid, deeply subordinated structures were offering just 12 to 24 months ago.”

But despite the brighter picture he paints, Mr Bory admits family offices and private clients face major challenges. Firstly, there is economic uncertainty triggered by the prolonged war in Ukraine, which his analysts predict will carry on through 2023 and potentially into 2024.

Going hand in hand with the supply chains damaged by Russia is the elevated inflation level, “meaningfully higher than pre-Covid, which is the main challenge which global and bond investors are going to contend with”.

This may be exacerbated by the lack of weapons left in central bank armouries to cope with disruption to their economies, as tighter monetary policy provides less of a backstop in today’s inflationary world. “The big change has been that the Fed is de-accelerating its pace of rate hikes as the ECB [European Central Bank] is notching up and inflation is everywhere, forcing tighter monetary policy and higher cost of capital,” he says. “But the ability of central banks to rush in and re-inflate economies is meaningfully buffered when economies are already inflated.”

Despite today’s challenges, Mr Bory clearly relishes a return to the more comfortable world of the 60-40 portfolio, where fixed income enjoyed a status not far removed from its equity cohabitors. He seems as happy today as during his stint at JP Morgan Investment Management during the late 1990s, when he began to interact with “some very sophisticated institutions” willing to make hay from the multi-currency fixed income boom spawned by the euro’s emergence.

“The correlation between stocks and bonds was clearly high last year, but it’s been high for the last 10 plus years, ever since central banks embarked on quantitative easing,” he says, fuelling a “one directional macro bet”, which eventually led all stocks and bonds to fall in unison.

“As we go forward, we think bonds will provide a more typical natural hedge against equity risk,” believes Mr Bory. “Last year saw massive repricing that should start to normalise correlations going forward.”

The message from a smiling, optimistic Mr Bory is a clear one: for all their challenges and vagaries, his bonds are back.