Worsening unease on Europe and slowing global growth have played their part – the changes toward weaker economic activity, weaker demand and more fiscal drag on trade are, says Jones, in the short term, deflationary.
“We have moved the fund long duration, even when compared to the 19 years embedded in the fund’s benchmark,” he explained.
“Perhaps more importantly is the fund’s underweight in real yield index-linked duration and our preference for conventional, long-dated interest rate exposure in the UK, Europe and the US. These positions have been implemented in physical assets, in futures and options markets and with interest rate swaps.”
This represents a marked difference from the beginning of the year and the team’s belief then that growth would be robust, that economies could weather the withdrawal of the extraordinary stimulus applied by governments and central banks, and that a slow but steady path back to growth could be achieved.
Jones revealed he has also sold down credit exposure, and in particular he has been cautious about high yield markets.
“Exposure in the fund now is a fraction of that carried at the start of the year. In equity markets, individual stock exposure has remained in the fund, but we have managed the overall exposure with a short equity overlay position created in the futures market. Currently the fund’s roughly 10% exposure to equities is fully hedged with, for example, S&P 500 index futures.”
Commodity exposure has been maintained with positions in gold and agricultural commodities. The former may be the ultimate ‘safe haven’ but corn, wheat and soya beans will benefit from weak supply profiles and ongoing demand from both population change and their use in biofuels.
A bearish mood dominates the thinking of the whole fixed income team. Stephen Snowden, who recently returned to Kames from Old Mutual Asset Managers, has moved to a defensive position within his Investment Grade Bond Fund, selling off banking exposure and buying into KFW – the German quasi-government bond – instead. An in-depth interview with Snowden about his return to Kames features in the forthcoming October issue of Portfolio Adviser, out soon.
