August saw a surge in investor interest in fixed income. What’s driving this trend, and how does it shape your investment strategy?

MEL: The current market environment is characterised by a significant inflow into fixed income investments, particularly as investors seek safety amid economic uncertainty. In August, we’ve observed a notable trend where investors are pouring cash into government bond, a clear sign of a shift towards fixed income.

This is largely driven by expectations of interest rate cuts from the Federal Reserve, which is prompting investors to secure yields before they potentially decline.

We view this as an opportune time to lock in these yields, particularly in longer-dated bonds, which offer a safer haven during market volatility.

There seems to be a disconnect between the stock market and the real economy. How does this influence your views on equity investments, particularly preferred stocks?

MEL: This decoupling between the equity markets and the real economy is becoming increasingly apparent. While the stock market continues to show resilience, particularly in the technology sector, underlying economic indicators suggest a slowdown. This gap is concerning and indicates that the equity market might be overvalued.

Consequently, we are leaning more towards preferred stocks and subordinated bonds, especially within the insurance sector, as they offer a more stable alternative with exposure to equity-like returns without the full volatility of the stock market.

Recent developments around Credit Suisse and CoCo bonds have raised concerns in the market. How have these events influenced your approach to these instruments?

MEL: The situation with Credit Suisse was indeed a significant shake-up, particularly with the AT1 bonds, also known as CoCo bonds. Investors faced substantial losses, with around $17 billion wiped out.

At Merill, we’ve always been cautious about CoCo bonds, viewing them as more akin to equity than traditional bonds due to their position on a bank’s balance sheet. This event reinforced our strategy to avoid such instruments. The risk they carry is substantial, and in crisis situations, as we saw with Credit Suisse, investors often have little control.

Our priority is ensuring our clients can sleep soundly at night, which is why we steer clear of high-risk, high-yield instruments that don’t align with our risk management philosophy.

Despite the recent failures of banks like Silicon Valley Bank and Signature Bank last year, high-yield bonds haven’t been significantly impacted. Can you explain why your strategy remains unaffected?

MEL: It was surprising to see that the fallout from these bank failures didn’t trigger broader issues in the high-yield market. The risks, particularly in the US, were well-contained. However, we still have concerns about the stability of regional banks compared to the major players like JPMorgan or Goldman Sachs.

We aim to deliver consistent, risk-adjusted returns, ensuring that our clients can remain confident in their investments even during turbulent times

That’s why we prefer European high-yield bonds over US ones. The European market offers more diversification, and we have a better understanding of the businesses involved. Our strategy remains conservative, with a limited exposure to US high-yield bonds, reflecting our cautious approach in uncertain times.

Your fund’s volatility has been a topic of discussion. Could you explain how you manage volatility and stabilise returns?

MEL: Managing volatility is central to our strategy. We actively manage the duration of our fixed income portfolio, adjusting as needed without resorting to tactical hedging through futures. This allows us to maintain a strategic view while being responsive to market changes.

Our focus is on selecting high-quality senior debt and adjusting our exposure to the equity market through subordinated bonds, rather than taking on additional risk. By carefully managing these factors, we aim to deliver consistent, risk-adjusted returns, ensuring that our clients can remain confident in their investments even during turbulent times.

With increasing geopolitical and macroeconomic risks, how are you adjusting your investment strategies?

MEL: Geopolitical tensions and macroeconomic risks are front of mind as we navigate the current landscape. We’re particularly cautious about the US market as we approach the upcoming election, which could introduce significant volatility.

In this environment, fixed income is becoming increasingly attractive as a safe haven. We continue to emphasise risk management, preferring sectors and instruments that offer stability and predictability. By staying conservative and focused on long-term strategies, we aim to protect our portfolios from the uncertainties ahead.

Any final thoughts on the current market environment?

MEL: The market is full of contradictions right now, with strong momentum in equities on one side and signals of caution from bonds on the other. In such an environment, it’s crucial to maintain a balanced and risk-aware approach.

We believe that fixed income offers valuable stability in these uncertain times, and we’ll continue to prioritise strategies that align with our core philosophy of risk management. It’s about being prepared for whatever comes next and ensuring that our clients’ investments are protected.

This interview is issued by Jesmond Mizzi Financial Advisors Limited (JMFA) and does not intend to give investment advice and the contents therein should not be construed as such. JMFA is licensed to conduct investment services by the MFSA, under the Investment Services Act. Merill SICAV plc is incorporated and licenced as an open-ended collective investment scheme, registered in Malta, qualifying as a Maltese UCITS in terms of the UCITS Directive with effect from the 16th October 2015.  The Fund is self-managed but has delegated the day-to-day investment management of the sub-funds to JMFA, who also promote and distribute the Fund. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on tel. 21224410 or e-mail info@jesmondmizzi.com.