The Kapsteam Absolute Return Income Fund was up +0.94% in January (+7.75% since January 2008). In their monthly commentary piece, Kapstream Capital discusses why bonds were not able to protect investors from losses in 2008.
Kapstream attributes the poor performance of bonds in the volatile markets of 2008 to fund managers, attempting to outperform their benchmarks, investing in higher risk instruments in the pursuit of higher yields from 2006 onwards. Bonds rated at BBB or higher were trading only 30-50 basis points above government bonds, while new products such as CDO's and CLO's were introduced, allowing managers to continue producing the high excess returns that they and investors were used to. Managers also either used cheap leverage or invested in lower quality bonds, or both, to increase returns. Once the markets began to reprice risk to more realistic levels in 2007 and 2008 these returns abruptly stopped.
As a result only bond managers that invested only in government bonds performed well in 2008, although the returns they achieved are unlikely to be repeated in 2009, due to lower interest rates and government intervention in the market.
