Bonds, The Baron and Biosemiotics

Neuroscientist David Eagleman drew my attention to Baron von Uexküll, a biologist whose work in Berlin during the 1920s highlighted an obvious but often underappreciated point: different animals are driven by different factors. A tick is blind and deaf, so heat and body odour is important to them. Meanwhile, a dog's life revolves around the 200 million scent receptors in its nose. In fact, a dog would mock the pathetic inefficiency of the human nose in being unable to pick up important information about its surroundings. A bat, however, is sensitive to air compression. Baron von Uexküll described this concept nearly 100 years ago with the term Umwelt. Like many German words Umwelt is difficult to translate exactly into English but call it one's world experience, the world you live in, or one's surroundings. So, for example, a tree can provide shade for a human, can be a place to store nuts for a squirrel, be a safe-haven for a cat, or for a dog - I leave it to your imagination! This struck a chord with my experience managing bond funds. We approach bond investing in a specific way, and I am always taken by the many different reactions I receive when I say I am a bond manager. The concept of the Umwelt applies perfectly to the wide range of comments I hear.

A bond in its essence is a simple instrument: a loan, usually from a company or a government, for a certain period of time which provides a regular income. The wonderful thing about a bond, if your objective is to hold it until it pays you back (which is our Umwelt), is that it is predictable. In contrast to the majority of investment choices one has in an uncertain world when buying a bond, you know how much you will make when you buy it. It is written in the prospectus: it has a start date, a stated regular income / coupon and an end date. A bond provides predictable returns if you buy and hold it.

But if you read some of the financial press, sensationalism can at times take over, leading people to think that bonds are the most unpredictable investment in the world. That is because it depends on one's Umwelt - like a tree, there are many other ways to use bonds. (And the boring predictability of buying and holding does not sell newspapers.)

It really depends on one's objective. Are you trying to achieve a high return by investing in the bonds of risky companies? In which case, you could worry every day about the strength of the company you are invested in. Or are you investing in government bonds and trying to predict what interest rates will be in five years' time? In which case, your focus will not be on the safety of your capital but on inflation predictions and how they will impact future interest rates. Do you want your money back soon or are you happy to lend it for a long time? As highlighted, such questions can dramatically change the attractiveness of the same bond for different people at any moment in time. To illustrate this further, imagine two ends of the spectrum: at one extreme you will find traditional bond investors who buy bonds and hold them to capture their income, and at the other end, there is the government bond day-trader who would hold a bond for a day and is only concerned with the movement of the bond's price that day. In one's Umwelt, for the day-trader who holds a bond for a day, his coupon earns only 0.001634% in a single day and is of little consequence. However, in our Umwelt, a bond with a 6% coupon triggers the image in our minds of pocketing 18% in cash over three years and the coupon income is very important. With money markets near zero, this Umwelt is the one we find extremely alluring.

So next time you read an article about the bond market, keep in mind why you would be interested in a bond or a bond fund. You may not be in the same Umwelt as a journalist. Are you interested in daily price movements in government bonds? Or political events in emerging market countries? Or like us, do you want to capture a predictable flow of income from large international companies? And when I say I am a bond manager, and you ask me about my views on today's price movement, or interest rates in 5 years' time don't be surprised if I give you a quizzical look of a dog observing a tick.


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