Callow slashes exposure to structured products

Mr Callow, who runs the £236.6m fund with Mark Wright, has slashed his structured weighting from 6.4 per cent to 1.8 per cent. He said this would fall to zero when his final holding matures later this month.

The manager said “counterparty issues” – which led to the collapse of several structured product firms when Lehman Brothers collapsed in 2008 – were behind the move.

“I am worried about tensions within the banking system for the macroeconomic reasons which are prevalent at the moment,” said Mr Callow. “We sold virtually all our structured products before the six central banks eased dollar liquidity a few weeks ago. There is a lot of cross-exposure in terms of debt between banks and I don’t need the worry.”

A structured product promises to pay a pre-agreed return over a fixed term, usually based on the performance of a particular stockmarket index. The counterparty, usually an investment bank, promises to provide the investment return. Mr Callow said the banking landscape would have to improve before he considered putting structured products back into the portfolio.

“Structured products have been a part of the fund for a long time, and that was appropriate then, but now we have a big sovereign debt issue and the banks have funding problems and nobody knows where the true risk is,” he said. “Dexia [a European bank] came out well in the stress tests earlier this year and went into liquidation. Taking out structured products removes a tail risk like this.”

Using the proceeds of the structured sales Mr Callow has bought into a short FTSE 100 derivative – meaning if the UK stockmarket market falls the fund will receive positive returns.

Elsewhere, the manager has switched a 2 per cent holding in UBS Global Asset Management’s £243.3m US Equity fund into the group’s £50.3m US Growth vehicle.