Long-time fixed-income investor David F. Hoffman cautions that chasing high-yield bonds or emerging-market bonds could prove to be risky if financial pressures creep back into the global bond market.
"In a very low-yield environment, there is a danger of getting desperate for yield and buying it anywhere you can," says Hoffman, co-manager of the $135-million CIBC Global Bondand managing director at Philadelphia-based Brandywine Global Investment Management LLC.
"We advocate a strategy that is sometimes willing to be more defensive and get more aggressive later, as opposed to getting aggressive as yields fall, and taking on more risk."
Hoffman is co-lead portfolio manager in charge of fixed-income products that total about US$38 billion in fixed-income assets, or more than three-quarters of the firm's US$49 billion in assets under management. The strategy behind CIBC Global Bond is similar to Brandywine's flagship US$3.2-billion Global Opportunistic Fixed Income, and is also used in many other accounts with US$18 billion in aggregate.
Besides acting as sub-advisors on CIBC Global Bond, which Hoffman has overseen since November 2006, Brandywine also manages the $175 million Renaissance Global Bond, and the fixed-income portion of the $437-million CIBC Global Monthly Income.
Rated four stars by Morningstar, CIBC Global Bond returned 7.1% for the 12 months ended March 31, compared with 4.9% for the median fund in the Global Fixed Income category. On a three- and five-year basis, the fund had an annualized return of 7.9% and 6.2%, respectively, compared with 4.3% and 3.8% for the category median.
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With yields at record lows, Hoffman has sold off the high-yield exposure and reduced investment-grade corporate bonds to about 6% of the CIBC portfolio, down sharply from 40% several years ago. "We've become more risk-averse across the board," says Hoffman, who shares duties with managing director Stephen S. Smith. "Yields on a lot of paper have come down to levels where there are limited further declines. We've been selling out, and going toward cash," says Hoffman, adding that rock-bottom government-bond yields may not continue for long either.
Indeed, Hoffman argues that growth may surprise on the upside, especially in the U.S. "We don't think it will be terribly inflationary, but you could get real yields rising at the long end of the curve."
The yield curve has been steepening since last summer, says Hoffman, noting that 30-year government bonds are yielding 3.15%. "It doesn't take too much to lose money, with these kinds of yields." In the world of fixed income investing, bond yields move in the opposite direction of prices. When yields move up, bond prices fall, resulting in capital losses.
A value-oriented investor, Hoffman regards sovereign bonds in developed markets as expensive. He does not own any Japanese bonds, because of their ultra-low yields and the weakness of the currency. In fact, on a currency basis, his team also has no exposure to the euro, and prefers the U.S. dollar, which accounts for about 55% of the fund's currency weighting.
Conversely, Hoffman likes countries such as Mexico and Poland, which account for about 5% and 6% of the fund, respectively. "Economies that are able to grow fast enough to support higher yields, and where the yield curves are not being manipulated by zero or near-zero short-term rates, have in the last year offered more attractive returns."
However, in a defensive move, Hoffman has reduced the fund's duration to below four years, versus 6.7 years for the benchmark Citigroup World Government Bond Index.
Hoffman limits single holdings to 20% of fund assets, and trades sparingly. For the six months ended Dec. 31, his portfolio turnover was 37.4%.
While thoroughly immersed in the world of fixed income, the native of Bryn Mawr, Pennsylvania, came to it in a roundabout fashion. Hoffman received a liberal arts education at Williams College, and in the course of earning a BA in art history in 1974 he developed an interest in philosophy and the ideas of the Austrian free-market economist Friedrich Hayek. Hoffman took a year off after school and travelled through Europe and North Africa, observing how economies functioned. His interest in the latter led to his first job as a money-market trader at Provident National Bank in 1975.
"It was a way to study economics and get paid, instead of going back to school," recalls Hoffman, noting that it was a volatile period to be learning about financial markets. In 1979, he joined INA Capital Management as a bond portfolio manager and rose to senior vice-president. Three years later, he went to New York and ran the bond desk at Columbus Circle Investors, where he stayed until 1990.
Hoffman went independent for almost five years, managing his own money out of a home office. But with a wife and three kids to support, he was persuaded by long-time friend Stephen Smith to join Brandywine, a small operation in 1995. "We had $35 million under management back then, but we grew it to $37 billion."
