InvestmentsOct 14 2014

Bezalel battens down the hatches

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Jupiter’s new star asset-gatherer, bond fund manager Ariel Bezalel, is battening down the hatches as a flurry of red flags loom large over global markets.

The manager has overhauled his £2.2bn Jupiter Strategic Bond fund, which is able to invest across the fixed income spectrum from government bonds to investment grade and high yield, putting it on a more defensive footing.

Citing the deteriorating global geopolitical backdrop, most prominently in the Middle East, China/Hong Kong, as well as Russia and Ukraine, Mr Bezalel said he was “very much in capital-preservation mode”.

In addition, he pointed out that not only had there been a collapse in commodity prices, most notably in copper, but there was a “big whiff of deflation now hanging over markets”.

The fact the end of supportive monetary policy, known as quantitative easing, is edging ever closer – particularly in the US – is also a concern.

“This all makes me very uncomfortable to be invested in corporate credit,” he said.

“It feels like we are heading into quite a volatile environment and credit across the board does not feel very good right now.”

Mr Bezalel was recently hailed by group chief executive Maarten Slendebroek as being at the vanguard of its efforts to expand across Europe, with his Dynamic Bond fund selling well internationally.

The manager is one of a new breed of future stars for the firm, which has seen the departure of several big names, including Tony Nutt and Philip Gibbs in recent years.

In order to adopt a defensive stance on his UK-based Strategic Bond fund, he has been buying bonds with increasingly higher credit ratings, including government bonds.

“We have been upping the credit quality and buying, for example, medium- and long-dated, high-quality sovereigns in Australia – it is the only long-dated government bond we own,” he said.

But while he has taken the axe to the riskier section of the fund’s assets, such as shortening high-yield duration, Mr Bezalel has simultaneously been adding an overlay of protection.

He has done this by reducing his contingent convertible exposure and purchasing some put-options on the high-yield side.

“We have been boosting our dollar exposure as another way of protecting the fund, and in terms of credit quality we have shifted up to BBB, to investment grade to help us sleep better at night,” he said.

But the average duration of the fund’s assets – a measure of its sensitivity to rises in interest rates – has “aggressively moved up”, shifting from about 1.75 years to 4.5 years in the past month alone.

Mr Bezalel has moved to invest in bonds with a longer lifespan because he thinks rate rises are unlikely in the immediate future.

“In the US, we will see the Federal Reserve going from hawkish to more dovish,” he said.

“I do not see a rate rise in the next year in the US. Right now, with deflationary forces taking hold, it is in no hurry to raise rates.

“In addition, wage growth is not coming through, and in regards to the jobs being created, these are poor quality. They do not pay – and are unlikely to get people spending much more.”

Mr Bezalel, who has managed the fund since its launch in June 2008, has since achieved a significant total return of 84 per cent versus an IMA Sterling Strategic Bond sector average of 45 per cent for the period.

In the past 12 months, he has matched the peer group mean performance of 6 per cent.

Cautious air growing among bond managers

Ariel Bezalel’s move to be more cautious is an about turn for him.

Just last year, he told Investment Adviser how he was seeking out esoteric, high-yielding areas of the market, including backing three loan-recovery companies.

Mr Bezalel also had pub company financing and oil rig financing company bonds, as well as paper issued by gold miners – all of which featured in his top 10 holdings at the end of February last year.

However, the manager seems to be more focused on protecting the portfolio than shooting the lights out.

This comes as more managers have been treading with slightly more trepidation when it comes to fixed income.

Invesco Perpetual bond veteran Paul Causer said earlier this year his Global Distribution fund – which invests in bonds and equities – would have a “toppy” weighting to equities, given what he then saw as relative value “as good as I have ever seen it”, particularly in stocks that paid a dividend.

Also, in July this year, a survey of reserve managers responsible for running more than 50 per cent of the world’s central banks’ assets found that many are gearing up to offload longer-term debt to protect themselves from losses when the Federal Reserve’s quantitative easing strategy comes to a close later this year.

The research, carried out by HSBC and Central Banking Publications, suggested central banks had already started to switch over into other riskier assets, including equities.