Stewart says to the end of November his strategic bond fund has seen AUM boosted by about £170m year on year, although he is quick to point out this has been a steadily ticking up since the start of the year rather than a sudden rush into the asset class.
In terms of portfolio make-up, at the start of the year the fund was 40% in high yield but that has progressively reduced to 34%. Meanwhile, exposure to investment grade, single-A and above, has grown from 19% of the fund to 26% over the same period.
Not too defensive
As for defensive plays, Stewart says the fund is “keeping some powder dry” through holding short-dated treble-A rated supranational bonds that offer liquidity, and short-dated bonds where the likelihood of call is high.
However, he also warns of being too defensive, noting that between 2004 and 2006 spreads were roughly 10% lower than they are today and stayed at that level for a long period.
He explains: “You can suddenly go really defensive but then the danger is that spreads stay the way they are. That is why we are still overweight high yield by a small portion because we could be in an environment where spreads stay low and continue to grind lower slowly – ie they continue to rally – but we think you may well get a correction before that.”
Diversification: the only defence
Andrew Herberts, head of private investment management at Thomas Miller Investment (TMI), says the firm’s managed portfolios are neutral, if slightly underweight, bonds and he has taken some of the interest rate sensitivity out.
He explains: “If you bought bonds now as an insurance you will pay a premium because as the economy continues to grow and central banks normalise rates, your capital will erode and you don’t have the income cushion, so it is more difficult to get into bonds as insurance.
“The only defence at the moment is diversification,” he adds.
While somewhat reluctant, because it is outsourcing asset allocation, Herberts says TMI has started to use strategic bond and absolute return funds because they can access scale. In addition, because they are unitised, they offer some client protection that TMI cannot.
“That flexibility is worth buying in as we can’t do it,” he adds.
