Axa’s Peirson brings bond exposure down to cash levels

Equities are on while bonds are off, says Axa’s Richard Peirson, highlighting the widening gap between equity valuations and the equivalent debt option.

Richard Peirson
Richard Peirson

The £363.1m Axa Managed Balanced fund, which sits in the IMA’s Mixed Investment 40% – 85% Shares sector, currently has minimal bond exposure based on “unsustainably low” yields.

He says: “I have reflected my cautious view on bonds by owning more cash. I currently have 11% in cash which is much much higher than I would normally have it and 11% in bonds.”

In the short term, Peirson has opted to keep this part of the portfolio “effectively dead”, preferring to use corporate and sovereign debt options as a hedge.

“Long dated bond yields are unsustainably low and therefore I am very cautious about the bonds I own so my overseas bond holding is 3% in 15-month German bund. It’s almost at redemption, yielding nothing but it’s a damage limitation investment,” he explains.

“In the UK portfolio, where I have less than I normally have, I’ve got about 40% in index linked and the rest is nine/ten year durations, so reasonably short dated. I think the index linked gives me a little bit of a hedge. Inflation is coming down at the moment but I’m not sure it’s coming down forever.”

In addition to government bonds offering such unappealing yields, corporate debt is failing to keep pace with the underlying equity.

Peirson indicates National Grid as an example of this lagging trend where purchasing the equity will deliver a 5-6% yield while the equivalent debt will only generate 3-4%.

The fund currently has a 78% weighting towards equities with house-builders forming the “major theme” of the UK portfolio so far this year.

Positions in Barratt and Persimmon have been added to the portfolio in recent weeks, as the majority of house-building companies are growing their profits and will produce two or three years of decent growth, says Peirson.

“I think they will continue to grow over the next few years, regardless of how strong the UK economy is,” he adds.