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Bond Market Outlook and Investing Strategy: Gibson Smith

  • Gibson Smith is the founder of Smith Capital and helped build Janus’ fixed income business.
  • He now runs Smith Capital Investors, a $2 billion firm with several outperforming funds.
  • He told Insider why he sees investors coming back to bonds, and why that 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 throughout 2022.

With stock and bond prices falling in unison, and bond yields low by historical measures, there just hasn’t been much for buyers to get excited 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 are starting to change.

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

Smith spent a decade working as chief investment officer of fixed income 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 more than $2 billion in assets.

According to Morningstar, Smith’s $1.7 billion flagship fund has out-returned 88% of its peers in the last five years, avoiding big losses at the end of a long bull market. The firm’s short duration fund has delivered better returns than 95% of other intermediate core bond funds in the last three years.

While Smith is encouraged that investors are starting to feel better about the fixed income market, he’s still taking a cautious tack himself.

“I am a big believer that the Fed and central banks around the globe are going to go too far,” he said, explaining that the Fed’s moves to tamp down inflation will hamper global economic growth and corporate earnings. “We want to be a little more defensive on the credit side, particularly in leveraged credit, where we’ve seen a huge rally over the last three weeks.”

He expects sustained volatility as investors try to get a read on where growth, rates, and credit spreads are headed. For now, he’s holding large positions in US Treasuries and has less exposure to mortgages and credit.

“We did like the positive real rates that we saw,” he said. “We wanted to make sure we had a lot of liquidity in our portfolios to take advantage of the volatility on the horizon. So we do have more exposure to Treasuries from an allocation standpoint and from a duration contribution standpoint.”

He’s also trimmed exposure to financials, saying that high volatility and yield curve inversions bring bad decisions from Wall Street. But Smith is bullish on the bond market, saying investors are going to 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 of the correlation between the bond market and the equity market,” he said. “If that starts to break down, the bond market will once again be a very good insurance policy against equity volatility.”

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