But, according to Michael Fredericks, manager of the BlackRock Global Multi Asset Income Fund, in the current environment, keeping some ammunition back is likely to pay dividends.
“Normally it is a drag on the yield, but if I own things that are yielding 2% and I sell 10% of that and sit in cash, it is only a 20 basis point hit to the yield of the fund, which isn’t a lot and it really lowers the risk profile, And, when there is a sell off, it enables you to go back in and deploy some of that dry powder,” he said.
Part of the reason for this desire to pare back some of the fund’s holdings is the amount of money that is sloshing about certain parts of the fixed income market.
As yields have come down across the board, so money has moved into traditionally higher risk areas of the market and has led, in some cases, to a mispricing of risk, he says.
“We have seen a lot of money move into the bank loan and the high yield market, but I do not believe this is a structural shift, that there is a new weight of money into these sectors. There are a lot of tourists in the market and everyone is under the impression that they will be able to get out first, or early, but these markets have the potential to re-price very quickly.”
Apart from a larger-than-normal cash holding, one of the ways Fredericks is looking to counteract the potential for such a re-pricing within the high-yield space is through a holding in ETFs.
“We still have a substantial allocation to high yield (about 20%), but 5% of that is through ETFs because we need to prepare for when there is a risk off event; ETFs will be liquid which is not necessarily the case for individual bonds,” he explains.
“It was a lot easier five or 10 years ago to solve for clients’ income needs because you could by high quality investment grade bonds and have capital preservation, and a healthy level of income. That is no longer the case, a lot of advisers are struggling to meet income needs,” he says.
He adds: “One of the dangers is that we have seen very low volatility across both the equity and bond markets and things have generally been going up in a fairly orderly fashion. As a result, there is a concern that people have been lulled into a false sense of security and are gradually being pushed up the risk spectrum without realising it.”
