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Gilt manager recommends option strategy to limit risk

Investors who are bearish on the outlook for gilts and bonds should consider using a fund that writes covered call options to limit risk, says Close Finsbury enhanced gilt fund manager Ian Williams.

Williams’ 110m fund writes covered call options on its gilt stock to enhance returns in a neutral market and protect against downside volatility in a bear market.

It is the only gilt product doing this although the technique is common among equity fund managers.

Williams says investors in corporate bonds are currently taking equity-style risk for bond-style returns. He gives the examples of GM and Ford, whose downgradings earlier this year wiped millions off the value of their bond stock.

He says 49 out of 50 wealth managers he has spoken to are bearish on the outlook for the gilt market.

Williams says: “If a gilt or bond investor likes a stock, such as Glaxo, they are better off buying Glaxo equity because they are not going to gain exposure to the upside, should it do well. But if the stock is downgraded, then they are exposed to the drop in value of the bonds.

“Most people think they have to hold gilts in their portfolios but they would rather mitigate the down- side risk.”

The fund aims to return between 6.25 and 7.25 per cent in a stable market and Williams says it will perform better than conventional gilt funds in all but a sharply strong market.

New Star fund of funds manager Mark Harris says: “It is an interesting fund that we have considered buying into but we could not find a place for it in our portfolios.

“It is one we might look at again with the launch of our cautious managed fund.”

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