Bond Market Outlook and Investment Strategy: Gibson Smith

  • Gibson Smith is the founder of Smith Capital and helped build Janus’ bond business.
  • He now runs Smith Capital Investors, a $2 billion firm with several outperforming funds.
  • He explained to Insider why he sees investors returning to bonds and why it should accelerate further.

In more than 30 years of investing, Gibson Smith says he’s never seen a bond market as “hated” as the one that has persisted through 2022.

With stock and bond prices falling in unison and bond yields low by historical metrics, buyers simply haven’t had much to cheer about – which is probably why. Smith said in early July that investors didn’t want to touch the bond. market. But in early August, he told Insider in a recent interview, things start to change.

“If we were to use a hate meter from 1 to 10, I think at the start of the year it was probably an 11 and right now it’s probably a seven,” he said. “Investors are slowly moving back into the middle and adding duration to portfolios.”

Smith spent a decade working as fixed income investment director at Janus Henderson, helping their bond business grow from less than $6 billion to $42 billion. He left Janus in 2016 and founded Smith Capital Investments, which now manages over $2 billion in assets.

According to Morningstar, Smith’s $1.7 billion flagship fund outperformed 88% of its peers over the past five years, avoiding big losses at the end of a long bull market. That of the firm short term fund has outperformed 95% of other mid-tier core bond funds over the past three years.

While Smith is encouraged that investors are starting to feel better about the fixed income market, he still takes a cautious approach himself.

“I am convinced that the Fed and central banks around the world are going to go too far,” he said, explaining that the Fed’s actions to curb inflation will hamper global economic growth and corporate earnings. . “We want to be a bit more defensive on the credit side, particularly leveraged credit, where we’ve seen a huge rally over the past three weeks.”

He expects sustained volatility as investors try to figure out where growth, rates and credit spreads are headed. For now, he holds large positions in US Treasuries and has less exposure to mortgages and credit.

“We liked the positive real rates we saw,” he said. “We wanted to make sure we had plenty of cash in our portfolios to take advantage of the volatility on the horizon. So we have more exposure to Treasuries from an allocation perspective and contribution to duration .”

He also reduced exposure to financials, saying high volatility and yield curve inversions lead to poor Wall Street decisions. But Smith is bullish on the bond market, saying investors will find more to like before long.

“I think the surprise that we could see here over the next six to nine months, which is really critical, is this breakdown in the correlation between the bond market and the stock market,” he said. “If it starts to crash, the bond market will again be a very good insurance policy against equity volatility.”


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