The manager of the Fidelity Strategic Bond, and (Luxembourg domiciled) Fidelity Flexible Bond funds said, while the firm has benefitted in the past 18 months from the funds’ relatively long duration position compared to its peers, Spreadbury said valuations no look more stretched than before.
The most recent moves, he said have largely been due to the run of disappointing economic data starting with May’s US payrolls report and more recently, concerns about the UK EU referendum.
And, he added: “Polls have indicated an increasing chance of a Brexit, which is being interpreted as a risk-off event for markets globally.”
“Government yields are well below expectations for nominal growth and we believe a significant deterioration in inflation and growth, or an expansion of monetary support globally, is needed to justify current valuations,” he said, adding: “While government bonds have benefited from a shortage of safe havens, which may continue over the short to medium term, we felt it prudent to reduce duration at these levels.
Reflected though a mix of UK, US, Australian and Euro positions, the funds now have a headline duration of five years, down from seven years, which it had at the end of May.
However, while it may seem tempting to reduce duration even further from here, Spreadbury cautioned investors not to underestimate the important diversification role duration still plays even when yields are “exceptionally low”.
“While we continue actively manage the overall level of duration in the fund, it is equally important to ensure adequate diversity of the sources of duration (across countries and currencies) and to maintain a broad asset mix in the fund. Combined, this helps to reduce the fund’s overall interest rate sensitivity as rates stay low.”
