John Chatfeild-Roberts has sold out of the £5.8bn M&G Strategic Corporate Bond fund in his £1.5bn Jupiter Merlin Balanced portfolio.
Mr Chatfeild-Roberts, Jupiter’s chief investment officer and head of the Merlin multi-manager team, has instead invested in Terry Smith’s £1.1bn Fundsmith Equity fund and cut the Merlin Balanced fund’s bond weighting by roughly a third.
Mr Woolnough’s Strategic Corporate Bond fund does still features in Mr Chatfeild-Roberts’ £4.4bn Merlin Income portfolio and £11m Merlin Conservative portfolio.
Algy Smith-Maxwell, manager alongside Mr Chatfeild-Roberts in the group’s independent funds team, said: fixed income exposure in Balanced had reached 25 per cent because owning them “was in investors’ favour”.
“In essence, investors were receiving equity-like returns from corporate bond investments,” he said.
“Since the start of the year, we have become increasingly concerned about the potential damaging effect that inflation may have on lower yielding fixed interest investments going forward.
“We believe, as a consequence, that it was appropriate to increase exposure to consumer goods companies that have the potential to grow earnings and dividends and help hedge the risk of inflation eating into the purchasing power of investors’ savings.”
Mr Smith-Maxwell said the team still had a “very high regard” for Mr Woolnough and that the M&G Strategic Corporate Bond fund had “made a tremendous contribution” to the performance of the Balanced fund.
M&G Strategic Corporate Bond remains in the £4.4bn Merlin Income portfolio and £11m Merlin Conservative.
Mr Chatfeild-Roberts said that the case for owning a 10-year government bond yielding little more than 2 per cent “looks pretty threadbare to us at a time when central banks are committed to ensuring the west partly inflates and partly grows out of today’s economic mess”.
While Mr Woolnough’s Strategic Corporate Bond fund only has 4 per cent in government bonds it has 85.8 per cent in investment grade credit, an area of the market where yields are also low and where securities are priced off the gilt market.
“It makes no sense to us to pay a multiple of nearly 50 times for the income stream on a 10-year gilt or a 10-year US Treasury, when you can buy a portfolio of blue chip companies for a multiple of only 13 times their current earnings stream, which have the potential for both capital and income growth,” Mr Chatfeild-Roberts said.
“Central bank policy is now actively encouraging investors to embrace risk at a time when it is possible to paint a picture of mildly improving economic growth as we progress through 2013.
“We believe that a rotation out of western sovereign bonds and into equities will continue.”
Elsewhere, Mr Chatfeild-Roberts and his team have sold out of the Polar Capital Global Technology fund in his £780m Merlin Worldwide and Henderson Global Technology in his £1.7bn Merlin Growth fund.