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Michael Sabia (Christinne Muschi For The Globe and Mail)
Michael Sabia (Christinne Muschi For The Globe and Mail)

Fixed Income

Bond party is over, says Caisse chief Sabia Add to ...

The bond party is over – this according to one of Canada’s biggest pension fund managers, which plans to cut back significantly on its fixed income holdings.

“Over the last three to four years returns on fixed income have been amazing – almost equity-like,” Michael Sabia, chief executive of the Caisse de dépôt et placement du Québec, told the Financial Times.

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“Our view on this is that the party is over, that therefore the eight to nines [per cent yield] we were earning are going to be replaced with twos, threes, maybe fours,” Mr. Sabia said.

The Caisse de dépôt manages more than $160-billion in private and public pension and insurance funds in Quebec. It is a big investor in British infrastructure, including a 13.3 per cent stake in Heathrow Airport and a 50 per cent stake in South East Water.

Mr. Sabia said the Caisse de dépôt will lower its $58.8-billion allocation to fixed income by $7-billion to $8-billion next year “as a starting point.” The money will be deployed to finance investments in less liquid assets such as private equity, real estate and infrastructure. The fund’s overall portfolio weighting in such alternative assets will change from a quarter today to 34 per cent.

The pension fund’s sentiment echoes that of GMO, the $104-billion (U.S.) Boston-based asset manager, which said it had “given up” on long-dated sovereign debt. This despite investors continuing to shovel billions into sovereign and corporate bonds, fuelling a rally in bond markets that some commentators warn has approached bubble proportions.

The Caisse de dépôt’s reallocation from fixed income is part of bigger shift away from a relative return approach – which involves benchmarking investments against indices – to focus on an absolute return model.

“I look at the returns that can be made either off the dividend or capital appreciation and I compare that with what we might earn in a fixed income portfolio and for me, that’s a good trade-off,” Mr. Sabia said.

“I’d rather put the money to work there and live with the notional increase in risk [than] from, say, a fixed income portfolio,” he added.

Diminishing returns from bond markets have prompted other institutional investors to question the asset class.

“Looking at valuation, 10-year bond yields in the U.K. and in the U.S. are at historic lows . . . suggesting bond markets have never been as overvalued as they are today,” said Mouhammed Choukeir, chief investment officer at Kleinwort Benson.

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