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Asset Allocation: M&G swaps US and UK government debt for ‘less risky’ assets

M&G fund manager Steven Andrew has slashed exposure to US and UK government debt in his £322m Episode Income fund to ward off concerns about potential risks emerging in the western economies.

A year ago over 25 per cent of the fund was invested in US and UK government debt because it was yielding 4 per cent, Andrew explains.

However, he has since reduced his position to 0 per cent for the UK and 5 per cent for the US because of high pricing.

He says: “This explains much of the good performance of the fund because the market decided to revalue the holding of long-dated government debts to an extent that for us was expensive.”

Andrew now considers UK and US government bonds risky. “My  appetite for risk is low so I don’t want something considered overpriced.”

The fund grew 15.2 per cent in the year to 28 February compared with an IA Mixed Investment 20-60% sector average of 6.9 per cent. Since 2010 the fund has delivered returns of 45.7 per cent against a sector average of 28.1 per cent.

In July last year, Andrew began reinvesting the bond allocation into the European equities market, shifting from zero exposure to 14.7 per cent in March this year.

At the same time he has reduced his US equity holdings from 22 per cent to 8.5  per cent.

“Before this move US equities were at a good price but now they are less cheap. The repricing of US equities throughout last year was a powerful stimulus to the performance of the fund overall.”

Andrew also argues market volatility can offer investors an opportunity “to buy something if the market is overreacting”.

Although he thinks there are positive returns to be gained from European equities, prices are still set for “a pretty gloomy” period in the face of continued eurozone uncertainty.

“We have to be careful and not to get ahead of ourselves.”


He says in the past two years companies with good yields have become very expensive in a variety of markets.

As a result, he is also looking into alternative investments for high- yield opportunities, such as corporate bonds and the non-mainstream government bond market.

Andrew backs UK equities, which account for 14.4 per cent of his equity exposure. However, he has not made any big calls on the asset class over the last nine months.

He says: “I am still perfectly happy with the valuation observation  in the UK because the entities

I am invested in are exposed to the improving economic environment both domestically and in Europe.”

He says UK equities are “pretty well priced” against their own history. “That alone tells you to buy at these prices. In a world of low return it is quite an appealing thing, although it is not as attractive as European assets.”

Unsurprisingly, Andrew admits the UK election offers a risk to future outcomes. He says: “The election may or may not give us that opportunity for better prices. All we can do is try to understand what the market price is telling us today.”

He concedes sterling is “vulnerable” but says his portfolio is “positioned for sterling weakness”.

Andrew says he will hedge back a minimum of 70 per cent of his foreign exchange positions back into sterling.

He says: “Election-wise, we are  going to expect a noisy time ahead but we need to stand on the other side on some of this volatility if we think good-value investments have been offered at a better price.”


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