With global government bond yields at historic lows, Jean Charbonneau believes it's time to be cautious and yet still flexible enough to respond to changes in the macroeconomic environment.
"Over the next year, I don't see any factors that could see bond yields rise," says Charbonneau, senior vice-president at Toronto-based AGF Investments Inc. and lead manager of the $326-million AGF Global Government Bond 
. "We are still stuck in a trading range. But U.S. 10-year treasuries recently touched a low at 1.44%."
The economic backdrop is stressed because of the European debt and banking malaise, a slowing Chinese economy and concerns about faltering U.S. growth. "We've seen lower numbers posted by the International Monetary Fund and OECD (Organization for Economic Co-operation and Development)," says Charbonneau. "They keep revising global GDP numbers downwards. We're into a banking crisis in Europe. And we're into a deleveraging mode, which makes it very hard for developed economies to grow."
A top-down investor, Charbonneau says we are into a "new normal" environment comprised of sub-par economic growth, distorted monetary policies leading to close-to-zero interest rates, and global uncertainty revolving around potential banking collapses and geopolitical tensions. "Studies of 800 years of data, in This Time is Different by Carmen Reinhart and Kenneth Rogoff, indicate these cycles can last eight to nine years. We are in for a few more years."
As someone who believes in management flexibility -- "buy and hold is no longer a valid approach"-- Charbonneau wants to be able to make rapid tactical changes. Currently, he is overweight on U.S., Canadian and UK bonds, relative to the benchmark Citigroup World Government Bond Index. "I'm staying away from the distressed countries in peripheral Europe," says Charbonneau, who shares duties with Tristan Sones, who specializes in credit analysis, and Tom Nakamura, a currency specialist.
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The team, which also includes Glenn Drodge and Vishang Chalwa, uses a mix of quantitative models and qualitative analysis to overweight or underweight different countries and determine duration. "In Europe, I have positions only in German bonds," says Charbonneau. "They are the safest. You stay in countries or markets that have some momentum."
Still, the environment is such that Charbonneau never expected U.S. treasury yields to fall so low this summer. "If I'd said a year ago that rates would be below 1.5%, it would have sounded like nonsense," he says. "But rates could go lower still. Why not? Look at Japan. Its 10-year benchmark is 0.8%."
A Franco-Ontarian who grew up in Hearst, Charbonneau is a 29-year industry veteran who graduated in 1983 with a bachelor of commerce at the University of Ottawa. His first job was at the Montreal Exchange, where he worked for eight months in different parts of the exchange floor.
In 1984, Charbonneau joined Desjardins Trust and spent a year as a stock trader for institutional accounts. He discovered his métier when he switched to the fixed-income side. "This is where it all started. I had an opportunity to replace the fixed-income trader and later became a fund manager."
Between 1988 and 1993, Charbonneau worked at the Caisse de dépôt et placement du Québec as chief trader and bond strategist on international fixed income. In 1996, after working in international fixed-income sales at two small investment dealers, he joined TAL Global Asset Management Inc.
Charbonneau stayed for 10 years, and became a partner in the process. During his tenure, he managed CIBC Global Bond and TAL Global Bond RSP, which was terminated. In late 2006, he joined AGF and assumed responsibility for AGF Global Government Bond. He also formed part of the team that oversees the $1.3-billion AGF Canadian Bond .
In June 2010, Charbonneau became co-lead manager, with Tom Nakamura, of the $116-million AGF Global Aggregate Bond MF Series. The fund has a broader mandate and currently holds a mixture of sovereign bonds, investment-grade corporate bonds and mortgage-backed securities.
Charbonneau's main foreign mandate, the 4-star rated AGF Global Government Bond, is comprised mainly of sovereign bonds from the developed world plus about 11% in emerging markets. The portfolio's duration is 6.4 years, slightly below the benchmark. For the five years ended June 30, the fund returned an annualized 5.5%, slightly ahead of the 5.4% median return in the Global Fixed Income category.
"It's hard to have high convictions in this environment," admits Charbonneau. "But you have to look at what the market is telling you. If you believe that we are in the 'new normal' environment, it means bond markets will get support from policy makers -- and the fact that we are in a period of sub-par growth." There are no quick fixes, Charbonneau adds. "Once in a while, you will get some positive statements from policy-makers. But then they are hard to implement. I'm not a big believer that we can turn this big machine around any time soon."
