Alliance Trust Asset Management will probably launch a strategic bond fund and cap the size of its Monthly Income Bond fund at £1 billion, according to its head of fixed income.
Rod Davidson says he considered launching a fund for the IMA’s £ Strategic Bond sector when he joined Alliance Trust last year.
However, he was uncomfortable at the time with valuations in high yield debt, to which sterling strategic bond funds typically allocate part of their portfolios.
Davidson says he will also most probably cap the £205m Monthly Income Bond fund that he helped launch in June last year into the £ Corporate Bond sector.
Davidson observes that a large fund can sometimes find it difficult to manoeuvre in the markets and may become subject to excessive attention from its parent company.
“It starts becoming part of the corporate agenda,” he says.
The fund has gained just 1% between its inception and November 1, compared with an average of 7.3% for the £ Corporate Bond sector and 9.8% for the fund’s iBoxx £ Corporate 5-15-year bond benchmark.
The duration of the average bond in the portfolio is 6.3 years, which means the fund will outperform if there is a risk of monetary policy tightening. Davidson also used gilt futures to reduce the duration of the fund as a whole to 3.9 years.
Despite high inflation, however, British monetary policy has recently loosened owing to the difficult economic environment.
As a result, Davidson remains cautious and has moved 5% of the fund from cash and gilts into bonds in defensive industries such as utilities and tobacco.
Nevertheless, Davidson adds that he has invested a little more of the portfolio in high yield debt off the back of extremely low valuations in the sector.