Suparna Sampath: «Why You Should Invest in Fixed Income»
Bonds offer steady income and act as a buffer during equity market downturns. In an interview with finews.asia, Vanguard's fixed income analyst Suparna Sampath explains why she prefers investment-grade bonds over other segments, citing the attractive balance between interest rate and credit components, except in the case of stagflation.
Suparna Sampath, the «Liberation Day» caused major price swings, even in the bond markets. Investors holding passive bond products were defenseless. Doesn’t this episode, along with the generally heightened volatility since then, make a case for active investing?
The debate between passive and active investing is nothing new. Yes, an active fund can respond, but it depends on whether the manager makes the right decisions. Investors who want to invest actively, therefore, need to be very precise in selecting their manager.
The selection process is crucial. Passive investors don’t have this problem. What we want is for investors to understand our products and assess the risks, regardless of whether they choose active or passive strategies. That’s why we design our products to be as straightforward as possible.
What does that mean in concrete terms?
It means that investment guidelines are clear and limits are fixed, such as for duration and average maturity in the bond sector. For example, if you buy one of our active IG funds, you know that our added value – our alpha – comes mainly from bond selection rather than from macro bets on interest rates or currencies.
«Investors should simply understand our products and be able to assess the risks – whether active or passive.»
So that means each bond issued by a borrower in the investment universe must be thoroughly analyzed?
Yes, we have a large team of credit analysts who scrutinize every sector, every issuer, and every bond. This is the foundation of what we offer as a bond house.
And what’s currently at the top of your favorites list?
In terms of sectors, we’re avoiding the auto industry and have a preference for financials.
But stocks and bonds of banks, like those of other sectors, have reacted strongly negatively to US tariff policies.
Yes, because they’re high-beta names and fully participate in market swings. But fundamentally, higher tariffs will only marginally impact banks. Moreover, they’re benefiting from tax relief and deregulation.
«From a fundamental perspective, higher tariffs will only have a minor impact on banks.»
The surge in interest rates after the COVID crisis temporarily made fixed income attractive again. But now central banks are lowering their policy rates. Is the bond comeback already over?
Yes, interest rates are falling again, but they won’t drop as low as they did in 2020. Instead of “lower for longer,” it’s now “higher for longer”. There may be fewer rate cuts than the markets currently expect, and the term premium is also higher. But ultimately, it comes down to a fundamental question…
And what is that?
Why invest in fixed income at all? Because, first, the asset class provides reliable income and, second, it generally protects capital when equity markets crash. I say “generally” because the negative correlation doesn’t always hold. 2022 was a year when virtually all asset classes except cash performed poorly. Today, there’s some risk that tariff policies could lead to stagflation, which would also undermine bonds’ protective function.
«Instead of ‹lower for longer›, interest rates are now ‹higher for longer›»
You specialize in a specific bond segment: IG euro bonds. How do you convince investors?
Our direct competitors are government bonds on the one hand. Here, the case for IG bonds is that their running yield is still quite attractive. Even if a recession were to occur, this segment would still deliver a positive total return. Yes, credit spreads would widen, which would reduce the value of outstanding bonds. But the lower interest rate environment would offset this effect. A stagflationary scenario would threaten this relationship, as I mentioned.
Don’t government bonds have the advantage of being much more liquid, even in crises?
The IG market remains quite liquid even then, as was confirmed on Liberation Day. Credit spreads did widen significantly, but there were always buyers and sellers.
«In stress situations, high-yield securities behave in a similar way to equities, which is not necessarily what you want as a bond investor.»
And what’s the competition on the other side?
That would be high-yield (HY) bonds, issued by borrowers below IG quality. They generally offer even higher yields, but their volatility can be extreme in stressful situations. In those times, HY bonds behave more like the equities of the same issuers, which is not what a bond investor typically wants. But of course, 2024 was an excellent year for HY.
What are the main drivers of performance for IG bonds?
First, duration, meaning interest-rate risk; and second, credit spreads, or credit risk. That’s why IG bonds have such advantageous portfolio properties. When the economy grows, they benefit from declining credit risk. When the economy shrinks, they’re attractive because of falling interest rates.
