With the expectation Europe will lag behind the US in terms of growth over the next 12 months, fund manager Ian Edmonds has reduced the level of risk in the portfolio and has been building up a buffer of liquid assets such as US agency mortgages, which are expected to benefit from quantitative easing.
Attractive supply/demand ratios have also encouraged investment in emerging market debt. Commenting on the changes, Edmonds said: “There will be challenges this year with the next rounds of US fiscal cliff negotiations and elections in Europe, so markets will remain volatile,” he says. “That is why we have built a buffer with a sizeable allocation to liquid assets. So while the fund is well positioned to generate good income, we can also take advantage of any opportunities caused by market volatility.”
Edmonds has also been selling off high-yield and investment grade corporate bonds in recent months, despite remaining supportive of credit fundamentals.
“After a strong period for credit, it is no longer cheap relative to risk-free assets and spreads are less attractive on an absolute level, although fundamentals remain reasonable. While we expect mid-single digit returns from high-yield in 2013 overall, we feel markets have grown somewhat complacent around potential volatility – despite all the ECB rhetoric, for example, there are still clear risks in the eurozone”
The fund manager maintains a level of cautious optimism, anticipating a continuation of the slow recovery, with a possible uptick in investor appetite for equities should Asia growth and US recovery continue.
“Risks remain, however, and, with a flexible bond fund, we have the ability to take advantage, both geographically and by asset class within the fixed income universe, of any market mispricing that may occur” he concluded.
