A more nimble approach is required

A resuscitation in sentiment in global markets, following the European Central Bank’s (ECB) three year long-term refinancing operation (LTRO) and more positive economic data from the US, has prompted some of the UK’s leading multi-managers to take a more bullish approach.

Typically, multi-manager funds aim to achieve long-term returns for their clients according to a number of different objectives. However, as the volatile markets of the past five years persist, multi-managers agree that a more tactical, nimble approach is now required when allocating investors’ money to different asset classes.

“What we don’t do is go blindly into it. We make changes as circumstances change,” says Tim Gardner, co-manager of multi-manager funds at Legal & General Investments.

Most recently, as the situation in Europe has moved to the back burner, the flight to the relative safety of assets such as US treasuries and UK gilts has started to fade away.

While investors fled riskier assets for top-quality government bonds in 2011 off the back of volatility in markets, the LTRO has reduced the perceived risk of losses in markets, or at least those attributable to the eurozone crisis. Investors have moved out of the safe haven of top-quality government bonds, putting upward pressure on their yields.

Multi-managers have therefore been selling some, if not all, of their exposure to the asset class. Graham Duce, co-head of multi-manager at Aberdeen Asset Management, says: “We have got minimal exposure to government bonds, as we feel that there’s little value to be had in sovereign debt with yields at these levels and we would expect in the medium term for yields to be back up. Obviously, yields have been suppressed by incredibly lax monetary policy and the intervention by authorities, which essentially had flattened the yield curve.”

Ian Aylward, senior portfolio manager at Aviva Investors, says his team is “quite wary for the future” of government bonds, whose yields were running below inflation at the start of this year. “We sold out of our gilt and government bond funds at the turn of the year. With yields on the 10 year UK gilts at 2-2.2 per cent we see no value,” he says.

Mr Gardner agrees: “We had a position in gilts last year and early this year, but we basically sold out early this year to lock in profits when gilt yields came down, as valuations no longer looked attractive.”

While managers have been moving out of sovereign debt, however, most appear to have taken advantage of the big difference between the yields on top-quality government bonds and corporate debt. As a result, a number of them have bought into high yield bonds.

“High yield I guess is an area that we added to in January, and we continue to be more optimistic there. With yields above 7 per cent we think it still offers a bit of value,” says Mr Aylward.