Kames Strat Bond ‘tempers’ duration underweight to ride out sell-off


Kames Strategic Bond fund co-manager Phil Milburn has reduced a long-term underweight in interest rate risk to reflect the “scale” of the recent sell-off in bonds.

Crucially, Milburn says he remains underweight duration risk across the £641.5m fund and that this positioning ultimately helped to come through the flight from bonds seen during May and June this year.

However the scale of the sell-off has prompted Milburn to add some interest rate risk to the fund and reduce the fund’s long-term underweight duration risk.

He says: “The main move during May and June was not having too much interest rate risk. However although we remain underweight duration, we have tempered the size of the position largely because of the scale of the sell-off.

“Where we have been since April 2011 has varied between about one year’s worth of duration to a peak of around 3.5 years. As we speak today we are at 2.8 years on an underlying basis and the headline figure would be nearer five years.”

Milburn adds that this position is also still underweight relative to the fund’s peers, although there is huge variation within the sector.

Duration in the fund has been made to “work harder” too, says Milburn, by moving underweight one market against another within government bonds.

He says: “We are making the duration risk work harder. For example the fund at the moment is underweight French government risk relative to bunds.

“So actually we are negative duration France and positive duration Germany but the two net off. We have also been working this duration hard around the globe in and out of Australia and Canada as well as Sweden.”

Within investment grade Milburn says he “prefers the spreads as opposed to the all-in yields” and as consequence is still hedging out a large part of the duration risk in this area of the fund.

Kames Strategic Bond’s cumulative performance to 8 August 2013

Kames Strategic Bond -1.96% 1.02% 6.89% 16.90% 44.97%
IMA £ Strategic Bond -2.67% 0.95% 5.80% 18.37% 36.77%
0.72% 0.07% 1.04% -1.24% 6.00%
  29 / 75 36 / 69 35 / 68 39 / 60 15 / 49
2 3 3 3 2

Source: FE Analytics