The fund manager’s view
Daniel Babington, portfolio manager, TAM Asset Management
Previously operating as a discretionary fund manager benchmarked to UK indices, UK government bonds formed a large part of our considerations. However, a move to a more global focus was not the only reason our allocation receded.
Gilts, which were yielding no income in real terms, offered a cocktail of ingredients not particularly appetising for investors. Allocators were served a poorly constructed blend of falling productivity, waning growth and the cavalier behaviour of Boris Johnson during his pandemic-stained premiership offering a particularly sour punch. This is on top of a heavy Brexit hangover that already starved investors of much appetite.
Recent months, however, have seen gilt yields soar amid pandemic-induced policies of monetary stimulus and fiscal expansion while inflation took a stranglehold of the narrative.
Powerhouse investors, like UK pension funds, who kept UK government debt in their strategic asset allocations, were hit by further tumult last year as ‘Trussonomics’ compounded the troubled outlook. As a result, some corners of the industry saw defensive portfolios suffer further drawdowns than their adventurous counterparts, as sovereign debt exuded junk bond characteristics.
At present, the Bank of England has been hiking rates for a year and a half, driving the 10-year gilt yield to peaks of 4.7% – a substantial return in nominal terms. However, the value of gilts is ostensibly interlinked with the path to bringing inflation under control. The lagging effect of rate increases is forcing policymakers to show patience, but we are beginning to see glimmers of a positive real rate on the horizon.
When yields approached 5% along with the 0.5% shock rate rise in June, it crystallised our view to the extent that we saw a positive dislocation in risk-reward. This was enough to enter the market and reintroduce gilts to our client portfolios with a view to cautiously topping up on further weakness.
To read more comments from Mirabaud Asset Management’s Valentin Bissat, Brooks Macdonald’s David Appleton and Parmenion’s Issac Stell in the September issue of Portfolio Adviser