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An Interview with Gibson Smith

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This is only my second blog post and already I’m pushing breakfast back to 2:30 in the afternoon —so decadent!On a more serious note, that was the most convenient time for me to chat with Gibson Smith, co-CIO and portfolio manager at Janus Capital. He was in town, accompanied by Colleen Denzler, head of fixed income strategy, to discuss a new white paper they’ve published on why it is an important time to use active bond management rather than passive—or even a bond ladder. That is, after Gibson finished marking the articles from Financial Planning’s September issue to read on the plane back to Denver.

But I wanted to talk about something else: why so few people had a well-thought-out bond strategy, whereas everyone seems to have a highly researched point of view about equities. Most people I hear talk about bonds seem to share one message: buy them. That’s asking for trouble, especially when we’re in a low-yield environment. (Notice I did not say “bubble.” More on that later.)

“Fixed-income strategy is one of the areas that’s been overlooked for one or two decades,” Gibson answered. The reason is simple: That’s the lifespan of an incredible bull market in bonds occasioned by disinflation, globalization and the downward drift of interest rates since their highs in the early 80s. Since then, bonds have been both a safe bet relative to equities, and a good investment. What’s more, Gibson points out, over the past 11 years, Treasuries have outperformed equities. That made it pretty easy for any old bond, bond fund, bond index or bond ETF to seem like a smart choice. No surprise, then, that money has poured into the sector.

“The events of 2008 led many investors into quasi-rebalancing and a pseudo capital preservation mindset,” Gibson says. (Obviously, he isn’t shy about his opinions.) “People migrate to fixed income and there’s an illusion of preservation of capital. That is true in some cases but there is still risk.

“Strategy is important; now that yields are down, people are looking at longer durations and that equals greater risk. So it’s really important for advisors to step back and think about their mix of fixed income and other investments—how and where you generate yield as well as the total return of the portfolio,” he says.

Clearly, interest rates can’t go much lower than they are now, and if you trade bonds, a rise in rates will bring a loss of principal. Nevertheless, individuals continue to yank money out of stocks and reallocate to bonds. And yet, Gibson dismisses the idea that we’re in a bond bubble: “People have been talking about a bubble for 18 months but yields continue to grind lower,” he says. “The 30-year bond is up 20% year-to-date and fixed income has outperformed equity by almost 10%. That’s forcing investors to step back and reconsider their allocations.”

At this point in our visit I got indelicate and reminisced about Janus’ participation in the tech bubble back in the glorious 90s, when Jim Craig was a genius and stocks, not bonds, were the answer. Gibson stuck to his guns. “If you look at absolute yield, we don’t have many reference points with a disinflationary or deflationary environment,” he says. “Today’s real return is close to long-term averages.”

This comment first ran on Sept. 3. Marion Asnes ia observing Rosh Hoshanah.


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