Premier Asset Management’s multi-asset team has taken money out of equities and high-yield bonds despite broadly positive views on the asset classes.
In fixed income, the firm has a preference for bonds with a short-duration and less sensitivity to interest rates due to inflation worries and the expectation that rates will rise at some point.
The high-yield sector has historically been less sensitive to interest rates than government and investment-grade bonds as credit quality of bond issuers has greater impact on prices. Default rates are at a record low and healthy balance sheets and a potential boost from merger and acquisition activity are also positives for the high- yield sector.
But Premier is concerned high yield has become too popular, attracting managers who would not normally invest in the sector. It is starting to reduce its high-yield bond and equity exposure ahead of an expected pullback in markets.
Most of the multi-asset team’s equity exposure is in defensive equities and UK smaller companies but investment director of pooled funds David Hambidge points out that smaller comp- anies does not mean start-ups.
He says: “Smaller companies are a good place for alpha generation in the more cyclical areas. We are not interested in jam-tomorrow companies. You can have smaller companies that are stronger than larger companies.
“The problem is when things get nasty, their share prices get hit and they get marked down harder and faster but that can lead to mispriced assets for value investors.”