For him the question is, do we have five hikes and the economy grinds to a halt, or will we have significantly higher inflation from here and we settle into a 4 to 5 per cent regime?
“It’s not yet obvious which way it will go,” he says, “but I suspect it won’t be like the 1970s – we won’t be talking 7 per cent inflation for the next 10 years. It’s in no one’s interest to break the market”.
So, what do you own in this environment? Certainly not 30 to 40-year bonds as they do not give you much more return, just increased volatility. “I’m more comfortable being reactive when things get overblown,” he says. “There is no easy trade this year.”
While subordinated financials are popular with many peers, Edwards prefers corporate hybrids as “you can make similar sorts of yields and money out of them and, if you are happy with a company, it makes sense to own the junior debt and get paid more.”
But from mid-2021 he has tilted more towards senior bank debt and added to insurance names – a play into business models that are more resilient to a higher inflationary environment. He has also been looking at real estate investment trusts – not retail or commercial property, but areas such as logistics.
This year is going to be difficult for fixed income assets across the board, but Edwards says it is a good time to be building into the future return profile of the fund. It is certainly a fund to consider for the credit part of any portfolio.
Darius McDermott is managing director of FundCalibre
