Artemis’s James Foster has removed positions in his portfolio which would benefit if government bond yields in the US and UK continued to rise.
Mr Foster last week closed the short position in his £527.8m Artemis Strategic Bond fund, which would gain money when yields rose on UK gilts, having earlier closed his short position on US treasuries, because he believed yields were reaching their upper limits.
He said that the government bond markets in the US and UK had “moved as much as we anticipated”.
“The general direction of yields is up but markets do not go in straight lines and yields have moved a long way in a short space of time, so banking a profit for a while seems like the right thing to do,” he said.
“These yield levels of roughly 2.9 per cent to 3 per cent for US treasuries will likely be where they settle for a few months.”
Earlier this month, Axa Investment Managers’ strategic bond manager Nick Hayes warned investors to prepare for losses when tapering finally hits, but Mr Foster said he disagreed with that view. “The market is beginning to price in tapering; it is just the rate of it that is the uncertainty,” he said.
Mr Foster said it was not the prospect of tapering but the “uncertainty around tapering” that was leading to volatility in markets, and added when the US Federal Reserve officially implemented tapering of its asset purchases then the market would “stabilise”.
The manager said the “steepness of the yield curve acts as a break on yields rising much further”, pointing to the spread of 250 basis points between a US two-year treasury bill and a 10-year bill.
He said such a wide spread had not been seen since 2011, and the spread had never moved wider than 300 basis points, which it would if yields continued to rise.
Mr Foster’s fund is in the top quartile of the IMA Sterling Strategic Bond sector in both one and three years, and the manager said it had been benefiting from its exposure to high yield, which has been as much as 50 per cent of the fund.
“In an environment where interest rates are going up, high-yield bonds perform the best because they are less exposed to the rate moves and the companies are better able to service their coupons when the economy improves,” he said.
“We feel well protected in high yield and should get the coupon, at least.”
The manager said he had also altered his exposure to bonds denominated in dollars, with IMA sector rules allowing the fund to have up to 20 per cent of the fund in currencies other than sterling.
He said: “Generally we do not take currency positions but it seemed that not hedging was appropriate for some of our holdings.”
Mr Foster said he had held a 6 per cent exposure to dollar assets but sold 3 percentage points of that when the dollar hit 1.5 against the pound, then bought back in to 6 per cent again when it moved back out to 1.56.
