View more on these topics

Mark Dampier: Evidence of a return to real data

Old Mutual’s Stewart Cowley believes we are returning to an investment environment where real data matters more than words

Mark-Dampier-700x450.jpg

I have remarked a number of times how the 2008 financial crisis has been tortuously difficult for many fund managers to navigate. Indeed, it is still ongoing in my view.

One obstacle has been the words and actions of central bankers across the globe that have effectively manipulated financial markets. Many investors have reacted instantaneously to just a few choice words of central bankers, leading to some rapid movements in stock and bond markets.

Last summer, for example, we saw a 1.5 per cent upwards move in US Treasury yields when Ben Bernanke first mentioned the idea of reducing the Federal Reserve’s bond buying programme, otherwise known as the “taper tantrum”.

Many bond managers have been wrong-footed by this. Most thought interest rates would have moved up by now in both the UK and the US. Yet five years on and we still have the emergency rate of 0.5 per cent.

Old Mutual Global Strategic Bond Fund manager Stewart Cowley suggests we are finally moving back to an evidence-based investment environment, where participants pay attention to real data, rather than acting on a set of words.

He also argues that Mark Carney’s recent speech, suggesting UK interest rates could rise sooner than markets expect, was in fact far more balanced than you might have read in the paper. It was the press and other market participants that focused on the part on rates rising faster than expected. 

What, in fact, Mark Carney was doing was simply stating the obvious – the emergency is over and, at some point, rates will need to rise.

My own opinion is the Bank of England still does not have a view of when this will be. While I believe rates will eventually rise, they are not going to move too much.

Cowley has been caught out a number of times more recently, including having a significant currency exposure to the US dollar which has been weak against sterling. Elsewhere, his general negative outlook on bonds has not served the fund well over the last couple of years.

The fund has been positioned to benefit from rising bond yields and falling prices, though this view is yet to come to fruition. For example, severe weather in the US caused a shock fall in economic growth at the beginning of this year. Bond markets acted accordingly with yields falling, proving painful for the fund.

Cowley, however, views this as a blip and overall is generally positive in his outlook for the US. As such, he maintains his negative outlook for US government bonds and the fund remains positioned to benefit from rising US bond yields. Around a third of the fund is also exposed to the US dollar. The manager expects improving economic data coming out of the US will support a strengthening dollar.

In Europe, the situation is different. The threat of deflation is present, while the introduction of quantitative easing is increasingly likely. He has recently taken profits and sold out of bond positions in Italy meaning the fund has no exposure to Southern Europe. He has, however, maintained a position in German bunds.

One-fifth of the portfolio is invested in corporate bonds, currently focused on the higher-quality, investment grade end of the bond market investing in robust businesses which he believes are capable of servicing their debts. He remains cautious in his outlook for higher-risk, high-yield bonds, believing the low yields on offer are not attractive enough for the level of risk taken.

In conclusion, this fund is designed to perform well in an environment of rising bond yields, namely in the UK and the US, and against a strengthening US dollar. Over the last couple of years, you might have fared better in a more traditional, straightforward corporate bond fund.

As such, I view this fund more as an insurance policy for when things turn sour. Eventually, bond yields will rise alongside interest rates, though it is hard to know exactly what the market fallout will be. Fixed interest might not be the only asset class to suffer; equities may also.

The issue really is much more one of timing and how far the bond setback will be. This is exactly the type of fund that will come into its own spectacularly at certain periods, as it did in 2008. I am certain it will have its day again, I just can’t tell you when.

Mark Dampier is head of research at Hargreaves Lansdown

 

Recommended

Business-Portfolio-Pen-Paper-700x450.jpg
4

Compliance experts warn claims firm EIS promotion breaches FCA rules

Claims firm Rebus is looking to raise £2m in anticipation of increased demand for its services following new HM Revenue & Customs powers to claim disputed tax. But compliance experts have questioned whether a promotion for its enterprise investment scheme breaches FCA rules. In an “investor alert” email last week, Rebus says HMRC’s more aggressive stance in […]

Cash-Money-Currency-700.jpg
2

Nest loses over £1m in fraud incident

Government-backed pension scheme Nest has recovered just £300,000 of the £1.4m lost in a mandate fraud last year, with “no realistic prospect” of the remaining funds being recouped. Last year, Nest was forced to undertake a root and branch review of its systems after Nest Corporation, the trustee body that runs the scheme, fell victim […]

Value remains within European equities

By Rob Burnett, Neptune European Opportunities Fund

In recent months, investors have become more pessimistic about both the European and the US economic outlook and yet stockmarkets have pushed on to new highs. Some would argue that this is a worrying divergence. We would take the opposite view. This appears to be classic bull market behaviour. A wall of worry has been rebuilt, and stockmarket resilience should be taken as a sign of strength. The market is discounting an improving economic outlook ahead, particularly in the south of Europe.

US: mid-year review and outlook

By Felix Wintle, Manager of the Neptune US Opportunities Fund H1 2014 Economic data: after last year’s strength, economic data has disappointed. Indeed, the economy contracted 2.9 per cent in the first three months of the year — the US economy’s worst performance for five years. However, rather than a symptom of underlying economic weakness or […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com