Threadneedle sees promise in bonds

Chris White, manager of Threadneedle’s £120m Managed Income fund of funds, says although he expects a “decent backdrop” for equities next year, he is likely to increase his bond allocation.

Chris White, manager of Threadneedle’s £120m Managed Income fund of funds, says he is positive on the outlook for equity markets, but is likely to increase his allocation to bonds in 2007. The portfolio held just under 79% of its assets in equities on December 13, overweight its peer group by 3%. However, White says this figure has been as high as 7% since he took over the fund in September 2002.

He says: “We have cut back our equity allocation and I am inclined to cut back further in due course. Reasonable growth and a continuation of merger and acquisition activity in the first six months of 2007 should provide a decent backdrop for equities. But the market remains concerned on a US slowdown, and that has implications for US and UK interest rates. We expect rates to peak in the first half of next year and the outlook for bonds is pretty good.”

White’s largest fixed income position is in Threadneedle’s Sterling Bond fund, with 16% of the portfolio. The £400m bond fund held 85% of its assets in government bonds on October 31, and White says he prefers gilts over corporate and high-yield bonds in the uncertain climate. More than three quarters of his 20% fixed income allocation is in treasuries. “Credit spreads are tight but they will widen if the environment deteriorates in the US,” he adds.

Managed Income is a fettered fund of funds and its three largest positions – Threadneedle Monthly Extra Income, UK Monthly Income and UK Equity Income – account for about 60% of the portfolio. White runs Monthly Extra Income with Andrew Crawford, as well as Pan-European Equity Dividend, launched in May. As reported in Fund Strategy on May 22, the fund targets a dividend yield 10% above the MSCI Pan European index. White says he bought the fund for Managed Income six months ago, in a bid to shore up dividends.

At the same time, he put money into UK Equity Alpha Income, and both funds now have weightings of about 7%. UK Equity Alpha Income was also launched in May and is run by Leigh Harrison. The Ucits III-enabled portfolio invests in a concentrated selection of British equities, with the flexibility to take large stock and sector positions. The addition of these “small, exciting offerings” was the major investment decision of 2006, White says.

Since taking on Managed Income, White has sought to move away from an over-emphasis on growth. He says: “We did not have the range of funds to meet a good income target in 2002. The fund had 60% of its assets in the same three holdings as now, but we had to fill the remainder with lower-yielding funds. We have launched more in the way of equity income products over the past year or two.”

White continues to hold 11% of the portfolio in the UK fund, predicting the performance gap between growth and value stocks will narrow in 2007. In addition to Managed Income, Monthly Extra Income and Pan-European Equity Dividend, White runs Threadneedle’s £340m UK Growth & Income portfolio. He will also take on the UK Overseas Earnings fund in the new year, when Michael Taylor moves into a consultancy role. Harrison, currently head of UK retail investments, is set to take Taylor’s title as head of UK equities.