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Scott the brave

As F&C growth and income manager Ted Scott moves back into bonds, Matt Goodburn gauges the reaction from other fund managers.

Amid uncertainty over the direction of world stockmarkets, F&C growth and income manager Ted Scott has started to buy bonds for the first time in four years.

Scott’s move is a defensive one. He has been reducing his position in mining stocks gradually since early in the year and clearly believes the current downturn has some way to run.

He says: “The bull market, driven by global growth increasing at sharper levels than anticipated, together with better than expected corporate profits and earnings, is entering a period of uncertainty.

“Monetary authorities around the world have in the last few months been raising interest rates, reflected in higher bond yields. At some point, that will trigger a slowdown in global growth.”

Scott has bought bonds in anticipation of further falls. “The likelihood of a mini bear market rather than a correction, is on the cards,” he says.

Credit Suisse head of multi-manager Gary Potter says he understands the reasoning behind Scott’s move but believes it is too soon to be buying bonds.

Potter says: “Either Scott expects the equity market to fall or he expects the return from bonds to be as good as equities. We have seen the 10-year bond yield in the UK go from below 4 per cent up to 4.7 per cent, so bonds certainly now look a better bet than they did a year ago.

“Whether they represent good value remains to be seen. It is possible that equities may have reached a plateau and managed distribution bonds may be more attractive but one should still take a cautious approach to bonds.”

Potter believes that increased inflation in Japan and Europe, as well as the real possibility of rises in the US, creates a ball and chain around bond value but he does not rule out following Scott’s example in the future.

“We are biding our time, holding back a bit of cash and having a look at bonds. Our central case is that equities are still more attractive in the long term,” he says.

Premier Asset Management fund of funds manager Richard Hambidge believes that if bond yields hit 5 per cent, it could trigger a rush by companies to buy. He admits that he has increased his exposure to investment-grade bonds mildly in recent weeks.

He says: “We are underweight on bonds but have just upped our allocation on fixed income and have seen yields pick up over 10 years to around 4.7 per cent. If yields continue to pick up, we would shift further towards bonds from equity. Five per cent could be the magic number.

“We have certainly reduced our equity exposure over the last few weeks but we are not bullish on bonds yet, although if they reach 5 per cent we would be interested.”

Joint manager of CF Miton’s special situations and strategic growth fund Tom McGrath has taken a defensive stance by increasing his cash levels rather than buying bonds. He says he is puzzled by Scott’s strategy.

“We turned bearish before the wobble happened. At the end of April, we had raised 35 per cent in cash on the strategic fund and 25 per cent in special sits, making it a big defensive call.

“Inflation fears are spooking the market but will scare bondholders, too. Scott is right to be a bit nervous about the market but why he is going for fixed interest, I do not know,” says McGrath.

Seven Investment Management’s Justin Urquhart Stewart believes the fundamentals behind Scott’s manoeuvre are sound but feels the timing is not quite right. He says: “The concept is right but the timing may be too early. Scott is brave in moving in a period of high volatility. We could see some significant dips but it does not mean we are entering a bear market. In the present environment, I would start looking at buying bonds again around July.”

Merrill Lynch Investment Management head of asset allocation and economics, Richard Urwin maintains that bond yields still appear too low in value.

He says: “The world has clearly changed and there has been a significant backup in bond yields but I still do not believe they represent a fantastic investment even though there has been a reasonable adjustment to make them look less expensive. The key issue is what happens in the long term to equities rather than to bonds. There are no signs of a profit recession and we expect still to see gains to the equity market.”

Urwin does make a case for having some bonds in a portfolio, however. “If you hold no bonds, you could make a case for increasing a bond weighting but equities still look the better long-term bet.”


Multi-manager View: Out for the discount

Given the market correction, multi-managers should make a tactical switch in direction and increase their exposure to closed-end funds. Historically, discounts have moved in line with sentiment within the London stockmarket so it is not surprising that they have widened since the market peaked on May 11.

Scot Eq policy valuations live on Exweb

Real time policy valuations from Scottish Equitable are now live on The Exchanges Exweb Gold service.Scot Eq is the sixth provider to support the valuations service that includes the ability to provide real-time aggregated policy valuations for pensions and bonds via electronic links.The Exchange managing director David Child says: The ability to access aggregated client […]


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