InvestmentsSep 3 2014

Toby Nangle invests in UK War Loan bond

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Threadneedle’s Toby Nangle has built up a position in a UK War Loan bond for his Dynamic Real Return fund.

Mr Nangle said he had bought the bond because it could deliver “the positive return and negative correlation to risk assets that bonds used to deliver in ‘the old days’”.

Having been issued in 1932, the War Loan is one of the oldest bonds available in the marketplace. It is a perpetual bond, meaning that it has no set maturity date, although the UK government has the option to ‘call’ the bond, returning capital to the bondholders, if certain conditions are met.

The investment is something of a one-off within Mr Nangle’s absolute return fund, given that he doesn’t favour UK government bonds within his asset allocation at the moment.

He explained that the rationale behind it was that the War Loan, which historically was tightly correlated to the longest-dated conventional gilts, at 30 years, now had a yield that was 70 basis points higher than the 30-year gilt.

Mr Nangle said the likely reason for this dislocation, which has grown significantly in the past three years, was that the War Loan was callable when it reached its par value, with a yield of 3.5 per cent, so investors’ upside was limited.

However, given that the yield is currently more than 4 per cent, it would take a significant government bond rally to reach that point.

He added that such a bond rally was not his base case, given that it would only result from “the ‘Japanification’ of the UK and the West more generally, which would be characterised by a combination of deflation and low growth”.

Mr Nangle said: “This economic outcome is by no means our base case. Instead, we see good prospects for medium-term economic growth.

“We do not feel that valuations are hugely compelling for 30-year conventional gilts, but see the additional 70 basis points of yield that comes from buying a callable bond to be sufficient to change the economics.

“With yields comparable with those seen pre-crisis, the War Loan looks like it could fulfil the positive return and negative correlation to risk assets that bonds used to deliver in ‘the

old days’.”

The Threadneedle Dynamic Real Return fund was launched in June 2013, with the aim of “targeting equity-like returns with around two-thirds of equity volatility” using a multi-asset approach.

Since its launch in June 2013 the fund has returned 6.5 per cent. The fund aims to deliver returns of 4 per cent above the consumer price index measure of inflation.

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