Multi-manager Hawksmoor believes that gilts and other developed market government bonds represent poor long-term value, even though the asset class has recently outperformed.
Bond investors would have benefited from rising prices in August as developed market bond yields fell. UK 10-year gilt yields decreased to 2.8 per cent and yields in Germany and Japan fell to 2.1 per cent and just under 1 per cent respectively.
Hawksmoor says one reason for the sharp drop in yields is the difficulty investors have in finding investments that provide attractive returns within an acceptable risk level.
The firm says poor economic data coming out of the US suggests that not all the elements for a sustainable recovery are in place, prompting a number of investors to take a pessimistic view of the global economy and become concerned about the potential for deflation. Against this backdrop, some investors have seen government bonds as a worthwhile investment but Hawksmoor sees no reason to change its stance on the asset class.
The firm says government bonds is a balancing act between avoiding low-risk assets when the risk is higher than perceived and investing in higher-risk assets where risk is lower than perceived. Its vanbrugh fund is holding global equity income funds and specialist fixed-income funds to gain higher yields than government bonds at a risk level it feels comfortable with.
Chief investment officer Richard Scott says: “We have little exposure to government bonds for two reasons. First, we judge the level of returns that can be achieved from government bonds after the effect of inflation and charges are unattractive. Second, the risks to those returns are being underestimated by many investors due to significant uncertainty about the future level of inflation and the health of government finances.”