Rogge Global Partners operates out of one of London’s most spectacular offices, the neo-Gothic Sion Hall, its traders toiling beneath the gaze of stained-glass images of heroes of the English Reformation.
After 15 years with John Milton looking over his shoulder, and five spent in Geneva with Lombard Odier, Olaf Rogge is imbued with a Calvinist spirit. The great reformer argued that Jesus had no problem with business loans, only with lending at interest to the poor - because that should be charity, freely-given. Lending out Rogge’s client’s capital isn’t charity - it has never experienced a corporate default - and it takes every precaution against it ending up that way.
“I came to asset management with the philosophy of a traditional banker - you only loan a guinea to the person who doesn’t need it,” Rogge says.
Rogge is also like those early Protestants in turning to the Old Testament to demonstrate the timelessness of his principles. He invokes Joseph’s advice, in Genesis 41, that Pharaoh should store 20% of the produce of seven years of plenty to see Egypt through the seven years of famine foretold in his dream.
“What happened when the famine started?” he asks. “The silos were full. When our bad years started we had nothing in the silos - our debt rose faster than ever during the bull market. Governments really mismanaged our economies.”
Markets - and politicians - missed this build up of debt because they are fixated on “the so-called growth statistic of GDP”, says Rogge. They did not want to acknowledge that the developed world’s growth was built on the sands of debt, or were persuaded by a generation of falling interest rates that debt could be refinanced indefinitely.
“Now people say, ‘We need growth’,” he says. “But that will generate even more debt. If too much debt was the problem of 2008, we are just going to further compound it but postpone the pain a little.”
It should come as no surprise that Rogge identifies its core philosophy as “identifying healthy entities” - particularly healthy countries - in the belief that they deliver the highest bond and currency returns over time.
But if everyone ignored those fundamentals for so long, how did Rogge’s conservative style deliver the excess return over its first 27 years that it did? It’s going to sound Calvinist, again.
“We avoided the biggest sinners,” he says. “Then we also looked at turnaround countries. But avoiding the sinners served us very well for 25 years.”
In fact the last 2-3 years have proven the toughest. Its key driver of risk is country allocation and, as Rogge sees it, quantitative easing made the biggest sinners - US Treasuries, UK Gilts - the best performers.
“There might be some LDI demand in the UK or US, but most of the downward pressure on yields today comes from an expectation of more quantitative easing,” he insists. “But in the long run QE is hyper-inflationary. Indeed, we already have massive inflation in commodities, prime real estate, the equity market - it just isn’t showing up in CPIs. Longer-term these countries are in a worse position than ever.”
Rogge’s frustration at the asymmetric risks of un-creditworthy sovereigns goes back to his days at MM Warburg drawing up loans, not to Pharaoh of Egypt, but to the Shah of Iran. He got used to missed coupons. What he couldn’t get used to was the bank’s senior partners taking the credit when money was repaid but his documentation being blamed when things went awry. That prompted his move into equities, eventually with Lombard Odier, where he was instrumental in institutionalising the clientbase by attracting names like IBM and United Airlines.
But he was destined to find his way back to bonds in the shape of an account from a catastrophic reinsurance company. Despite managing it “almost as a sideline”, he was surprised to find himself outperforming his peers. Rogge identified two key reasons. First, competitors tended to “over-manage” to smooth-out volatility. With his emphasis on healthy credits, Rogge felt able to look through quarterly price swings: he delivered the best returns but the ‘worst’ volatility. Second, the reinsurance account became a truly global strategy as Rogge came to appreciate the considerable dispersion of country returns.
Take the six largest bond markets: the US, Japan, the UK, Germany, Australia, Canada. What has been the average dispersion of calendar-year returns of the best and worst over 27 years? Five percentage points? 10?
“In fact it is 24 percentage points,” he says. “If you are solely a domestic fixed income investor you miss that opportunity.”
While competitors positioned for the duration cycle or rotated in and out of higher-yielding countries, Rogge focused on longer-term credit fundamentals. And despite the difficulties presented by QE, he insists that his approach is not out-of-date: with global capital “hunting for a real rate of return”, healthier countries will inevitably outperform again, he argues.
But Rogge is not really interested in the sovereign universe today: around 60% of clients assets are now in global corporate credit.
“The only real yields available are in corporate bonds,” he says. “And even if they weren’t, governments are bankrupt and household debt is sustainable only thanks to zero percent rates. But global corporations are sitting on more money than ever, which also means that they are under very little pressure to issue more debt.”
Investors need to be careful, however. Rogge says that corporations are enjoying record profitability and low taxes from friendly governments desperate for job-creating investment. But if jobs don’t materialise, the same governments will feel pressure to create them themselves - and raise taxes. At that point the healthiest companies will be those flexible enough to shift away from domestic demand and re-locate out of reach of the fiscal grab. It will also help if they have that infrastructure in place already, so bondholders don’t have to fund it; if they are competing globally on quality rather than price; and, of course, if they have healthy balance sheets.
“Corporate debt is very simple,” as Rogge puts it. “You get that spread over governments and win by not losing.”
But what about those real yields? A handful of companies’ bonds already trade through sovereigns. Most spreads are pretty wide, but absolute credit yields are not high, and in Rogge’s scenario of rising inflation and rates, surely the highest-quality investment grade corporates must either trade through their sovereigns en masse or pick up a big dose of duration?
“You always have to look at relative value,” Rogge agrees. But he struggles to see a time in the near future when developed-market sovereign yields will compensate for the risk they pose.
He feels that there are much safer yield opportunities left in emerging market debt and currencies, for example. “We believe that Latin America is totally neglected, and are looking at some kind of partnership in that area,” he says. On the client side, the firm recently won a key corporate bonds mandate from Chile’s central bank.
Right now, he finds that clients are expressing most interest in high-yield. He warms to the subject, because here the quality-focused philosophy really comes into its own - particularly after the “the good, the bad and the ugly” have had so much money thrown at them to refinance.
“It’s vital that we own high yield issuers who are growing their earnings, and not just surviving,” he says. “Even a CCC zombie looks good for the next three years because money managers are desperate for yield and will speculate to get it. It’s a minefield.”
That is the discipline that has navigated almost 30 years of bond market surprises. Not for Rogge the Augustinian “Make me chaste - but not yet!” Calvin would approve.