RWC’s Allwright puts 90% of funds into bunds
RWC’s Peter Allwright has piled 90 per cent of his two funds into German government bonds, amid concern over shrinking liquidity and the global economy taking a turn for the worse.
“All I want to be in is government bonds as credit has no liquidity in the secondary market and high yield is effectively shut now,” he said.
“The best case scenario is that we have a long, slow Japanese-style lost decade, while the worst case scenario is wheelbarrows and hyperinflation.”
Mr Allwright, who manages the group’s Luxembourg-domiciled $38.5m (£24.9m) Cautious Absolute Rate and Currency (ARC) fund and the $54.4m Enhanced ARC fund with Stuart Frost, said any rallies in riskier assets at present are based on “hope rather than reality” adding that quantitative easing (QE) “won’t solve the problem”.
“The problem is too big to solve just through QE. We might get a relief rally but the economic data has turned so quickly,” he said.
“Trade flows in Asia have fallen off a cliff since April, and this has manifested itself in the oil price and shipping indices. Global trade is collapsing and that’s not going to come back soon.”
The move into German government bonds or ‘bunds’ by the manager came as Fitch last week downgraded Spain’s credit rating by three notches to ‘BBB’ and the eurozone purchasing managers’ index came in at a three-year low of 45.1 in May.
Germany last month sold €4.5bn (£3.6bn) of two-year government bonds at a record low yield of 0.07 per cent, showing that investors are not being put off by the high price of what they perceive to be a safe-haven asset class.
The two-year ‘Schatz’ bonds sold with a zero-coupon for the first time and saw bids of €7.7bn, compared to a maximum sales target of €5bn.
In the fourth quarter of last year, Mr Allwright held sovereign debt issued from Denmark, the Netherlands, Sweden and Germany as well as paper issued by the European Investment Bank (EIB).
But the manager sold his Dutch debt holdings across the first and second quarters prior to the collapse of the country’s government, and also liquidated his 10 per cent stake in the EIB paper in May as a “precaution” based on the view liquidity of the debt could deteriorate if the macroeconomic picture worsened.
He still retains a residual holding in Swedish sovereign debt, with the rest of the fund in currency futures and options.
The manager said that the Ucits rules enable him to hold such a large amount in German debt as the weighting is made up of different bond issues.