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Low points

Interest rates have been the centre of many investment discussions in the past year. With the Bank of England deciding to hold interest rates at their historically low level of 0.5 per cent, it appears that this topic is not likely to go away any time soon.

The obvious impact of low interest rates is smaller mortgage payments, the low-rate environment also affects choice in investments and their performance.

Choosing what managers, asset class, sector or even geographic area in which to place money is a difficult decision in the best of times. In today’s rapidly changing markets and continuingly bleak economic arena, the choice is even more complex but advisers also have to look more closely at areas within funds which have typically been taken for granted.

For example, in the past, advisers and investors have looked at cash weightings in funds to determine a fund manager’s stance on markets, with higher cash positions generally signalling a bearish outlook. These days, with many managers holding bigger amounts in cash, the question is more about how managers are handling these positions rather than the levels.

North Investment Partners chief executive John Husselbee sees the new norm for manager cash levels as being around 10-15 per cent and his own cash positions have gone as high as 30 per cent in recent times, something that he is content to keep for the near term. But at the same time, he said, he is under increased pressure from the low interest rate environment to make the cash work harder.

He considers that investors looking at funds should be examining not just the cash position of a manager but what they are doing with it as well as its security and actual liquidity. He says: “If you are getting anything over base rates, you are taking a risk, so what type of risk is it? There is pressure to make cash work harder but you have to make sure there is still some balance between risk and reward.”

Typically, when economies are in trouble, the asset class of choice has tended to be government debt. Not so these days. The returns on government bonds are not just low these days – they are losing money, at least at the long end while the short end of the sovereign debt market is requiring greater flexibility, skill and trading than ever before.

Twenty Four Asset Management managing partner Mark Holman says investors need to be more aware of the bite that low interest rates can have, pointing out that the long end of the treasury market would have lost investors substantial capital in recent months. He notes that a 30-year treasury, a T-bond, bought last December, fell by 33 per cent in value in six months. On December 18, the 30-year treasury was priced at 136.13 and by early June it had dropped to 91.91. Holman says returns from the long end of the gilt market have not been as bad as treasuries, as it has been supported by the UK Government buying up its own debt but they are still in negative territory.

He says the shorter end of the gilt market has had opportunities although his own preference in such a market is for floating rate notes, which he says are less sensitive to interest rates and rate expectations.

Husselbee also comments on opportunities in short-dated gilts but says this type of purchase is more of a trade these days, which is not a game that many managers are comfortable playing.

Hargreaves Lansdown head of research Mark Dampier says he is looking at more active gilt managers in this market, considering the volatility that government debt has been experiencing.

Dampier believes the lower interest rate environment and difficult economic conditions are likely to drag on for some time and investors need to be flexible in their approach. He believes claims of green shoots of recovery have been overdone and that the market will range trade for some time yet.

He has been looking at holding a cross-section of managers to better enable returns in such an uncertain time. For example, within domestic equities, he has looked at holding conviction managers such as Invesco Perpetual’s Neil Woodford while also holding very active managers such as Schroders’ Richard Buxton. Still a believer in corporate bonds, he is also buying a number of different styles within that space.

Wanting managers who can take advantage of pocket rallies during this long middle ground of recovery, Dampier has also been leaning more towards more adaptable fund mandates such as absolute return. He says: “Although it is a cliche, we are in a stockpickers’ market. I am not sure I would want a passive fund right now. I want a manager who has greater flexibility to try and achieve returns.”

Husselbee has also been looking more towards these vehicles, such as those on offer from Cazenove, BlackRock, Gartmore and Polar Capital. Whatever area investors go into, Holman believes one fundamental change has to occur and that is investor expectations of returns.

Husselbee points out the need for the management of investors’ know- ledge of what is happening, noting that during the March rally, many were quick to criticise funds which were not fully invested or managers who missed the upward surge. “We are investors, not traders,” he says.

Advisers are faced with a tough job at the moment. Choosing funds is one thing but there are a myriad of other elements at work in the markets today that they need to assess. Low interest rates may be a boon to mortgage payments but their presence and the impact they have on all types of investments need to be understood and acknowledged by investors.


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