Standard Life Investments has reduced its exposure to government bonds in its £2bn MyFolio range.
A 10 per cent government bond exposure in the medium-risk funds has been cut in the last six weeks.
Standard Life Investments head of fund of funds management Bambos Hambi says the multi-asset team was concerned about the risk associated with its government bond exposure.
He says: “Government bonds will not be the defensive asset class that people think it is. The projected returns are too low in government bonds and so we have reduced dramatically our government bond exposure.”
Hambi says they have added to cash, equities, corporate bonds and introduced absolute return bond funds as a separate asset class.
He adds: “We have been in GARS since launch, using it as a proxy to equity. Absolute return bond funds are lower volatility than GARS.”
Another fund added to the range is the £17.2bn PIMCO Unconstrained Bond fund and the team has bought short duration corporate bond funds to protect against interest rate increases.
He says: “When interest rates are put up, it will hurt government bonds. Reducing the duration of the portfolio protects against the downside from such an event. The one certainty is at some stage interest rates will go up and so we are positioning ourselves correctly for the next few years.”
Hargreaves Lansdown senior investment manager Adrian Lowcock says: “While interest rates might not rise next year, there is an increasing risk they may do. Especially if you look at the US, if the economy improves and houses prices get better, then interest rates could rise sooner rather than later.”
“Given where yields are at the moment, if sentiment does change, it could change quite quickly. So you could easily get caught out on pricing on government bonds and lose a lot of capital value very quickly.”