Old Mutual Global Investors’ multi-manager team has reduced exposure to government bonds in favour of global investment grade, while holding a cash position in the hope of allocating to an absolute return-style manager.
OMGI head of multi-asset John Ventre points to a general trend occurring across the range of Old Mutual Spectrum multi-manager funds to reduce overall exposure to government bonds.
In particular, Ventre notes that the funds have continued to reduce their allocation to gilts from 20 per cent at the end of 2012 down to 8 per cent today.
Ventre attributes this recent move to a “breakdown” of the benefits of holding government bonds as a diversifier and for protection against volatility as well as their negative correlation to equities.
“We see the negative correlation and the diversification benefit of government bonds starting to breakdown,” he says.
“It has certainly not all gone but the power of government bonds as a kind of volatility anchor for portfolios – deflation being the big risk for equities and deflation being good for government bonds – is starting to break down because we are entering a phase where the market is considering what happens when government bond yields start to rise and the implications for equities.”
Global investment grade looks more attractive, argues Ventre, thanks to its shorter duration and higher yield than gilts while providing “more of a margin of safety in a rising rate environment”.
The multi-manager team have also built up an 8 per cent cash position under a cash plus strategy, as a result of the move out of government bonds.
Ventre details plans to allocate this to an absolute return manager, adding: “We haven’t made that allocation decision yet so at the moment our cash plus strategy allocation is actually in cash.”
Combined, these reallocations have a yield of approximately 3.8 per cent in composite and a duration of around 3 per cent, according to Ventre. He adds: “So rates can rise by about 100bps before we would lose any money on a one-year view.”