The current market uncertainty has left many multi-asset investors with a “gilt dilemma” as defensive and cautious fund typically hold a large allocation to government bonds, according to Legal and General Investments multi-index funds lead manager Justin Onuekwusi.
Speaking to FTAdviser, he said that with the unprecedented expansion in balance sheets of central banks over the last few years, it is likely that gilts will exhibit more volatility going forward than they have historically.
Although gilt yields have increased, they still remain very low by historical standards, to the extent that many investors may be wary of holding them, he added.
“We believe central banks in the UK and US are nearing initial lift-off for interest rises and given the low yielding bond environment there is potential for market volatility, particularly with the mixed communication messages that we have been getting from the Bank of England.
“To combat this we are currently aiming to diversify globally across the fixed income spectrum and to be more active with fixed income allocation.”
Mr Onuekwusi explained that since the financial crisis, the historically almost risk-free government debt of the UK, US and France has all been downgraded, exposing the need for geographic diversification.
He added that most recently, L&G’s range of five risk-targeted multi-index funds have taken a position in a short-duration credit fund, as the holding is deemed more resistant to interest rate fluctuations than the rest of the portfolio.
The team also recently added global corporate bonds in the lower risk funds, which will be managed on an active basis rather than in an index fund.
Mr Onuekwusi said he is positive on emerging markets and each of the multi-index funds have overweight positions relative to their risk profiles at present. He blamed “idiosyncratic shocks” for the wobbles in emerging markets, rather than changes in global market conditions.
“It is important not to be complacent, though, as China has the potential of being a global market mover and the source of more short-term volatility. However, the risk that China poses to the world economy has been usurped by the situation in the Ukraine and now in Iraq.
“These situations seem to be continually escalating and with this in mind, emerging market equities may continue to be volatile particularly over short time horizons.”
