Legal & General fund manager Richard Hodges has increased hedging activity within the £1.8bn L&G Dynamic Bond Trust.
Hodges expects corporate bond spreads and interest rates to remain rangebound and volatile this year and has been dynamically adjusting his hedges through the first half with this in mind.
“I always run my fund with risk in mind and I’m happy to forego some of the upside to reduce expected volatility in the fund,” he says.
Hodges has hedged 39 per cent of his fund through credit default swaps and related derivatives.
Hodges says: “I am using a greater degree of hedging because of my experience over the past three years. I am willing to take risk but at the same time I am willing to use derivatives and all the tools available to try and protect me on the downside.”
In the manager’s view, bond market volatility is likely to continue for another 12 to 18 months as markets react to uncertainty surrounding the Federal Reserve’s quantitative easing programme.
“We have so little certainty in financial markets. The only certainty we had was that QE would still be here,” he says.
Hodges has invested around 15 to 20 per cent of the L&G Dynamic Bond fund in higher yielding assets that will mature in 2015/2016 in the expectation that interest rates will have risen by this point.
He says: “The intention is that I will be able to re-invest the proceeds and purchase new assets at higher interest rates and in the meantime, the fund is earning a good yield. I believe government yields in the UK will stay low over this period. Short-term interest rates are well anchored and I expect government bond yields to trade in a range.”
On 4 July 2013, newly instated Bank of England governor Mark Carney used his first Monetary Policy Meeting to play down the chances of a near-term rise in interest rates.
The BoE kept the base rate at its historically low 0.5 per cent and released a statement that said: “There have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time.
”The implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy.”
L&G Dynamic Bond’s cumulative performance to 9 July 2013
|25 / 73||25 / 68||28 / 68||43 / 60||1 / 49|
Source: FE Analytics