Ian Kenny, head of fixed income and manager of the Short Dated Corporate Bond fund, said 30% of the portfolio’s short-dated bonds are currently US dollar-denominated, compared with just 1.8% in European paper.
For a sterling credit investor, Kenny contends there are more investment opportunities outside the UK right now because of the divergence in global yields over the past several years.
While US, UK and European yields have historically mapped quite tightly together, now individual political and economic drivers are forcing yields further apart, he said.
“In 2012, German yields were lurching lower aggressively whereas the US and UK behaved a little bit more. Then, the UK started to peel away from the US loosely by the end of 2014 and then more aggressively since 2016.”
Most recently, the “Trump reflationary enthusiasm” has resulted in a steeper yield curve for US Treasuries as well as the key local dynamic affecting UK yields in the Brexit negotiations.
“Now, we’re seeing that Germany is at the lower end, the UK is in the middle and up a bit higher, we see the US curve.
By broadening his scope beyond sterling credit and buying European bonds issued in sterling and US coupons, Kenny argues he has made the portfolio more resilient at a time when volatility and political uncertainty are still palpable.
“Looking beyond sterling credit allows me to increase my universe and get stock specific diversification.
“As a portfolio manager, you’re trying to balance risk and return at all times. A lot of times, the risks aren’t always clear. It’s about getting that balance and resilience and identifying risk adjusted opportunities.”
“And right now, a 30% weighting to the dollar is not a bad risk-adjusted place to be.”
