The Fidelity multi-manager income fund is investing in areas of the bond market that are less sensitive to interest rates due to concerns that rates will rise to curb inflation.
Fund manager Eugene Philalithis is taking an overweight position in corporate bonds but reducing exposure to investment-grade bonds in favour of high yield.
High yield bonds tend to be less sensitive to interest rate changes than government and investment-grade corporate bonds because their prices are more a reflection of the credit quality of the issuers.
Philalithis also has some government bond exposure in the portfolio to hedge against the risk of widening credit spreads, where corporate bond yields move further away from government bond yields to compensate investors for taking on higher risk.
Philalithis is playing the theme of getting an extra return relative to government bonds with low sensitivity to interest rates through listed closed-ended funds.
He holds the London-listed Brevan Howard credit catalysts fund, a feeder fund that invests in corporate and asset-backed credit markets through the Brevan Howard credit catalysts master fund.
Philalithis is also looking at a listed fund, which he is currently unable to disclose, that invests in less liquid parts of the corporate bond market.
Philalithis says: “There is a lot of concern about inflation and interest rate hikes. I am trying to keep sensitivity to interest rates low but am favouring high-yield corporate bonds and reducing investment-grade exposure. I am also looking at listed vehicles to give us the risk premium without any interest-rate risk.”