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Hawksmoor takes a hard line on gilts

Hawksmoor Investment Management is limiting exposure to government bonds in its Vanbrugh fund of funds due to concern about sovereign debt in Japan, some parts of Europe and the US.

The multi-manager has around 5 per cent of Vanbrugh in sovereign debt.

It says it was amazed it took Standard & Poor’s so long to downgrade the outlook on US sovereign debt from stable to negative.

It questions whether US Treasuries can be viewed as attractive low-risk investments, given that a yield of around 3.3 per cent on 10-year US Treasuries seems poor considering the risks represented by the depreciation of the dollar, inflation and rising interest rates.

Vanbrugh’s fixed interest exposure is focused on specialist areas such as secured loans. The firm’s holding in the Henderson diversified income fund, an investment trust with more than half its weighting in secured loans, was recently halved as the share price rose to trade at a premium to its net asset value.

But Vanbrugh’s overall exposure to secured loans increased through a 3.6 per cent holding in the newly launched NB global floating rate fund. This invests in around 100 senior secured loans of big US and European companies.

Unlike corporate bonds, which have fixed coupons, interest rates on secured loans are linked to Libor. They are attractive when interest rates rise, as coupons also rise. Interest rate rises are negative for corporate bonds, as their fixed coupons start looking unattractive relative to the level of risk being taken.

Negative duration strategies, where bond fund managers use shorting under the Ucits III rules to produce positive returns when bond prices are falling, are also attracting Hawksmoor.

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