Premier Asset Management director of multi-asset David Hambidge has been adding floating rate debt to two of the firm’s funds to reduce interest rate risk.
Floating rate debt has a variable interest rate and so protects investors from a rise in interest rates.
He has doubled the exposure to floating rate debt in the £116m Premier Multi-Asset Distribution and £22m Premier Monthly Income funds from 5 to 10 per cent this year.
Hambidge says: “Our biggest fear over the long-term is interest rate risk. We do not believe we are getting paid enough in traditional corporate bond funds to take that interest rate risk on. If you buy a traditional corporate bond, you get around seven to eight years interest rate risk. Within our bond portfolios, that figure is three.
“We are getting decent yields on floating rate debt. When interest rates go up, you get a rising return profile, as they are linked to three-month Libor typically. In the meantime, you are going to get a reasonable amount of income.”
Hambidge says the next shock for markets will be growth and that is likely to result in a normalisation of interest rates.
He says: “This is unlikely to be in the next 12 to 18 months, but it is hard to tell. If you are thinking that way, you should position your portfolios for that now.”
Bestinvest senior research analyst Ben Seager-Scott says: “The chance of an interest rate hike in the short-term is unlikely, but given how low they presently are there is only one way they can really go, which will cause a fall in capital values for fixed bonds.”