Armstrong Investment Managers has increased its exposure to utilities and high yield - both investments that are considered inflationary hedges - across its Distinction fund range.
Patrick and Ana Armstrong, its founders, have tripled their holding in the db x-trackers Stoxx 600 Utilities ETF to 10% of their Diversified Real Return and Conservative Real Return funds. They have also added the Muzinich Short Duration High Yield fund, which comprises 5% of their range.
The duo consider low-yielding government bonds an unsuitable investment in the present environment as bond investors would need a fall in inflation to get a positive real return.
Bond markets appear to be worried about deflation, yet the pair expect deflationary forces to be more than offset by further quantitative easing and large budget deficits. “Yields are artificially low as central banks buy their own bonds and China and other emerging markets try to keep their currencies from running away by buying US 10-year bonds as well,” says Patrick Armstrong. (article continues below)
Eventually, he warns, bond markets will demand higher yields based on a “terrible fiscal situation” regarding state debt and inflation. He expects the government’s credibility to falter as the fiscal situation worsens.
The Distinction funds aim to beat inflation by preserving and increasing the purchasing value of a portfolio through a multi-asset real return approach.
Because of currency appreciation in the China region the managers have taken a 5% position in Singapore dollars and 5% in the Korean won.