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McQuaker warning over gilt exposure

Henderson head of multi-manager Bill McQuaker says investors should be wary of holding too much exposure to gilts, as he does not expect the 2011 rally to continue.

Gilts rallied last year as investors flocked to safe haven assets as the eurozone sovereign debt crisis deepened.

McQuaker says: “Gilts performed well last year due to artificial reasons, such as government intervention of different shapes and forms, like banks buying gilts and regulation applied to insurance and pension funds for them to own gilts. One has to be wary of too much exposure to gilts. There is one rally left in gilts this year, which could be triggered, for example, by Spain pushing back its budget deficit goals or the US slipping into a recession. After a rally, investors are vulnerable and so it is about finding the time to get out of gilts.”

He says gilt yields cannot fall much lower so there is not much scope for prices to go higher. He says: “I think the dollar could be a better safe haven now, as I do not think it is likely to fall too much. Gilts are expensive now and yields cannot fall much lower than they are.”

Bestinvest senior investment adviser Adrian Lowcock says: “If you buy gilts now, when they are yielding 2 per cent and inflation is around 4 per cent in the UK, you are buying into negative real returns.”

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