“Dislocated” markets are becoming difficult to read so the Old Mutual Spectrum 5 fund is remaining diversified and avoiding the most consensus trades.
Old Mutual head of multi-manager John Ventre says the disconnect between the bond market and inflation expectations driven by the massive drop in the oil price is likely to unravel this year.
Government bond yields have priced in a fall in future inflation expectations based on a lower oil price, but momentum appears to have pushed values too far, he says.
“When you have markets that are quite dislocated like this and in conflict with each other, by definition we have to see volatility for that to unwind.
“Everyone’s positioned the same way: avoid the euro and oil, and love government bonds.
“Consensus trades have to get unwound at some point.”
The amount of global monetary manipulation is shrinking, he says, as the US has bowed out of bond buying and the European Central Bank’s €60bn monthly quantitative easing programme is much smaller than the Federal Reserve’s.
The shock tightening of yields that followed the end of tapering surprised everyone, and sends a worrying signal about the economy, he adds.
“If you listen to the bond market, what it’s telling you is we’re heading into a great recession,” he says. “We don’t really think that, but that was Crispin Odey’s comment the other day – the bond market is telling us there’s something massively wrong with economies right now.
“We don’t want to think that’s the case, but you can’t discount it entirely.”
The £647.2m Spectrum 5 fund therefore is slightly underweight equities, has fewer US equities than its rivals on valuation grounds and has no exposure to western sovereign bonds.
High yield exposure is focused on a distressed debt fund that has an inherently low interest rate sensitivity.
Another fixed income strategy is buying local currency emerging market government debt, taking advantage of large premiums compared with hard currency bonds.
“It’s quite a good diversifier as well, as it’s not correlated with a lot of other stuff, so it doesn’t use up much absolute risk,” Ventre says.
“You can also pick up really healthy real yields. Brazil,for example, has 6.5 per cent inflation, but its debt is yielding 12 per cent.”
Dollar-denominated debt offers 4.3 per cent, compared with the real yield of 5.5 per cent for real-denominated bonds.
The portfolio is broadly neutral European equities and looking at bolstering its position, however Ventre says the team is waiting for “some momentum” first.
“We’re looking for some kind of European strength other than just the weakness in the currency.”
The euro has fallen from $1.35 to around $1.10 in six months, but it has been a gradual revaluation which has made for a “very, very smooth” transition, he adds.
About a fifth of the portfolio is allocated to the Old Mutual Voyager Global Dynamic Equity fund. The fund holds 10 to 15 mandates with other asset managers that are combined into a large pot, rather than run as many single mandates for individual funds.
The multi-manager ranges than buy into the fund to get their core equity exposure. The Spectrum fund has to pay the underlying management charges, but OMGI costs are rebated.
“These mandates give us an advantage because they allow us to access fund management talent across the globe rather than just within Ucits vehicles, which would otherwise be the case,” Ventre says.
“Thus, the 20 per cent weight actually represents typically no more than about a 2 per cent portfolio weight at the top level of Spectrum.”