Even the best ideas are bad at the wrong price

“There’s no such thing as a bad idea.” the saying goes. While this might be true in a ‘brainstorming’ session: it’s not true when you’re investing. In fact, the team at DNCA Invest Alpha Bonds fund would contend the opposite is true. Even the best ideas can be bad if the price is wrong.

At all times, DNCA Invest Alpha Bonds fund must have at least 75% of its assets in OECD issuers and a significant component of the portfolio is generally made up of US sovereign bonds, both nominal and inflation protected securities. Over the past five years the fund has maintained an average of 80% of its assets in investment grade instruments.

The fact that OECD bonds are unlikely to default and are highly liquid (easy to buy and sell), doesn’t necessarily mean they are a good investment. It is only when these qualities are combined with an understanding of the macro environment and a firm belief that they are trading below what they are worth, that a good investment can be found.

For example, in August 2024 the Royal Bank of New Zealandⁱ cut rates for the first time in the cycle amid subdued employment figures, slowing economic growth and decelerating inflation. Expectations were for more cuts, but this doesn’t always mean a strong return on investment. So, the DNCA Team ran the different options through their proprietary Risk Adjusted Term premium (RATP) valuation tool, RATP to test their assumptions. RATP is an enhanced version of the Sharpe Ratio that validates the team’s macroeconomic assessments and indicates whether a bond is cheap or expensive.

RATP view of 10 year New Zealand Government Bonds

Source: DNCA, as of January 2025. The reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Past performance is not necessarily indicative of its future performance.

The RATP suggested 10-year NZ bonds looked attractive, so in November the team initiated a position. NZ sovereign bonds continued to outperform throughout the remainder of 2024 and into January, when some market participants started taking profits.

When is the right time to take on more risk?

Another way in which the RATP tool helps to improve the quality of the team’s decision-making is when it comes to weighing up risk and return along a particular interest rate curve. The theory says you should expect a higher yield from longer-dated bonds, because you are taking greater duration risk – more things could happen to a bond that you aren’t expecting over the course of 30 years than over the course of 10 years. But, in reality, it is impossible to have an accurate macroeconomic forecast for a full 30-year horizon. So, the team understands that levels of expected volatility tend to be the key driver of long-term bond yields.

In these circumstances the team’s RATP tool comes into its own, helping them weigh up the risks of holding longer dated bonds against the yield offered. And, as you can see in the chart below, there are times when it pays to be in the longer-dated, higher-risk option and times when you are likely to be better off holding the less risky option.

RATP view of 10 year and 30 year German Government Bonds (Bunds)

Source: DNCA as of 30 January 2026. Data may change over time. Past performance is not necessarily indicative of its future performance.

Conclusion

Theories are a great place to start your investment decision-making process, but they often break down when subjected to real-world conditions. DNCA’s rigorous investment process, and its proprietary bond valuation tool (RATP) help to ensure its investment team is making decisions based on real-life conditions. It also helps them to take advantage of pricing anomalies, even when academic theory suggests they don’t make much sense.