The Goalie is asleep- who defends?

Defensive Assets- The Goalie is asleep- who defends?

Asset manager “herd” –overweight OR underweight.


  1. The “risk free rate” is a theoretical concept as there is always risk when investing in government debt. It is calculated by subtracting the inflation rate from the Treasury Bond “coupon” (interest rate) of your specific investment duration. In some currencies they are perilously close to negative.

  2. The golden rule for bond management: “When interest rates go down bond values rise. When interest rates rise bond values go down”.

  3. Momentum Asset Managers “10 year government bond yield” ( USD and GBP) shows a 40 year bull market for bonds as interest rates have fallen. The graph suggests a significant inflection point. Bonds have been the go-to defensive asset, but is now a sleeping Goalkeeper - how deep is the sleep? The VAM Sanlam view on US interest rates: “in the short-term they will remain anchored at zero for the foreseeable future. We see the goalie snoozing for some time to come!”

  4. We asked The Herd to provide us with 4 defensive assets to support our Goalie. Points 2 and 3 leave research departments of our Herd straining sinews for alternative defenders.

  5. Although all 4 commit a lower weighting to fixed interest securities (details within our report) the other top three defenders are:

  6. Quilter Cheviot: Absolute Return; property; infrastructure.

  7. Momentum Asset Managers: Absolute Return; gold; defensive currencies.

  8. VAM/Sanlam: property; infrastructure; equities.,

  9. Russell Asset Managers: gold, defensive currencies, and equities.

Defensive Assets- The Goalie is asleep- who defends?

Who is our Goalkeeper? “Bond, James Bond?”- no, we are discussing bonds- government bonds. A concept being shaken but not stirred. Government bonds have been the go-to asset class for defensive and income-based portfolios for a good 40 years plus. Yet, current investment managers are certainly shaken by the consequences of the potential of rising interest rates leading to capital loss from investing in the genre. Their task in the circumstances is to stir up other asset classes to provide a defensive posture for capital protection. Our task for our Herd of research departments is: which assets should be in our defensive wall?

Timely because veteran investment managers have habitually looked at government debt as the so-called “risk-free” asset class. The “risk-free rate” has always been a theory rather than a reality. However, that concept would be abused by rising interest rates to the extent that our sleeping goalie is a valid conceptual similarly.

How so? The golden rule for bonds is: “when interest rates go up bond values go down when interest rates go down bond values go up”- and with that rule look at the graph below to reflect current anxiety:

With thanks to Momentum Asset Managers, the graph shows that in both currencies where the “risk-free rate” is a common reference point (USD and Sterling) interest rate decline has been stunning. It reflects something like a 40-year bull market on bond values rising (because interest rates are falling) taking us to 2019 and a period of bottom trawling as interest rates hobbled along the bottom. Zero being the Marina Trench. With nowhere deeper to go, and with inflation (April Newsletter) – formally on the doorstep now in the hallway- the concept of our sleeping goalie reflects a clear inflection point for interest rates. They must, at some point, go up (surely?). True or false- the credibility of government being the best goalkeeper for our income and cautious portfolios is challenged

The task for our Herd of fund managers this week is to help us pick a defensive wall. We gave The Herd the simple question: “In respect of protecting capital for defensive portfolios and USD income focussed portfolios, name your top four defensive assets, and what is your short-term view on US interest rates?”.

For clarity, we expect The Herd to “know” what we mean when asking to name their defensive options. Still, a useful definition is provided by Daniel Joliffe (Quilters Cheviot) “ the interpretation of what qualifies as a ‘defensive’ asset appears to have been rather fluid over the past 18 months. I consider a defensive asset to relate to an investment that will be low risk, will not suffer from a significant drawdown, and will generate low, relatively stable returns. Essentially, a defensive investment should provide an element of capital preservation to a portfolio. During the onset of the pandemic in March 2020, government bonds were the perfect defensive investment, and performed strongly as investors sought stability in the face of falling equity markets. However, it is unlikely that many investors would consider government bonds as a defensive investment given the current implications of rising inflation and rising interest rates on the asset class.”


Firstly, the Goalkeeper. Despite “risk-free” being only a concept, it seems that all The Herd continue some trust in government debt. However, my Bali T-Shirt rings in my ears “Same, Same but different”. Same because government debt is still featured in their portfolios. Different because the weighting is reduced and the extension into other forms of debt very clear. Secondly, it is clear that our herd are straining the sinews of their research departments to find defensive alternatives to government fixed interest debt.


Given the positioning of our article readers may be surprised by the continued holding in government fixed interest- so to Daniel Jolliffe t QC: “We still see value in holding fixed-interest securities within client portfolios, especially for clients who require an income and/or a conservative attitude to risk. The outlook for the asset class will be strongly impacted by rising inflationary pressure and the prospect of rising interest rates. The continued tightening of credit spreads means that investors are currently not being paid a significant premium to take on the additional risk in owning corporate bonds over government bonds”.

With prospects of inflation and rising interest rates a threat, Lorenzo La Posta (Momentum Asset Management) includes TIPS (Treasury Inflated Protected Securities) within their cautious USD approach to ensure that purchasing power is protected. Here we need to note that “fixed interest” actually means fixed to inflation and therefore variable in actual terms. Lorenzo takes the following view on interest rates given last weeks FED (Federal Reserve Meeting) leaving no change to rates... but… he quotes FED Chair Powell acknowledging “that they are "talking about talking" about tapering credit stimulus. We think bond yields are more likely to increase than decrease over the next 6-12 months, due to increasing inflation (although to a lesser extent than what feared by some) and better economic conditions. However, after such a profound sell-off as we’ve seen over the past few months it is not unreasonable to expect some consolidation in the shorter term. Also, we are conscious that the US central bank is going to be very cautious about any rates decision and that data on inflation, employment, and economic activity will be the main driver of such decisions”.

Demonstrating that “fixed interest rates” is a large genre, Phil Smeaton introduces more scope to the term by voting in corporate bonds- specifically “Short Duration Corporate Bonds – with low credit risk but a higher yield than is available in the government bond space (e.g. Tesco 3.322% bond maturing 05/11/2025) “.


For Phil Smeaton at Sanlam – his other three defensive nominations are:

  1. Infrastructure – whose cash flows are long-term, often government-backed and typically have inflation protection built into them (e.g. 3i Infrastructure)

  2. Property: Selected REITs – investing in property away from sectors impacted by structural change, towards areas of secular growth (e.g. Mapletree Logistics Trust that invests in logistics warehouses in Asia).

  3. Equities in stable companies – with acceptable valuations and a competitive advantage allowing them to compound earnings impressively over time (e.g. Johnson & Johnson).

For Lorenzo La Posta at Momentum:

  1. Gold: needs no introduction as a safe haven asset.

  2. Defensive foreign currencies: such as Japanese Yen and Swiss Franc. These really do need an introduction as a defensive play. Creative thinking.

  3. Absolute Return Strategies: Uncorrelated strategies, such as hedge funds, long-volatility, trend following and global macro

For Daniel Joliffe at Quilter Cheviot:

  1. Absolute return funds – Are included within discretionary portfolios to hedge-against equity market volatility. Absolute return funds can provide investors with exposure to wide-range of strategies such as long/short and merger arbitrage.

  2. Property – Residential property markets are likely to experience buoyancy due to huge monetary and fiscal support, low mortgage rates and swift vaccine roll-outs. Supply shortages are also likely to drive property prices upward in the short term. The outlook for commercial property is less clear given the pandemic-induced trend of working from home and the likely negative impact on demand.

  3. Infrastructure – Offers investors steady cash-flow and the potential for inflation-protection. Infrastructure is essential to a functioning society and consists of physical structures as well as services. Infrastructure has strong links to ESG-factors due to the increasing demand for clean energy, waste and water services.

For Russell Investments- we attach an article written in October 2020 by Van Lu. We include it here because the general theme of the potential for rising rates has been around for a good few months and what we are now witnessing is even more emphasis from asset managers on looking around for other assets for defensive portfolios. When Van Lu explains equities as an alternative to bonds- the sense of encouragement towards risk assets over the traditional defensive stalwart (bonds) is evidence of the sense that our goalkeeper really is asleep and we even need to bring our attackers back into the defensive wall: “While we emphasise that bonds still have a role to play as a risk-reducer and deflation hedge, we believe that they will not be as powerful a counterweight to equity risk as in the past. It is time to look at some worthwhile alternatives to nominal Treasuries: inflation-linked bonds, gold, defensive equities and currencies++34 and equity options, to name a few.”


For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC, please contact us at

+971 56 2228 535

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