Fixed IncomeNov 26 2014

Newton’s Paul Brain hit by short-term losses

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Newton’s Paul Brain has endured short-term losses after a premature, wholesale move away from peripheral European bonds.

The manager of the group’s £1bn Global Dynamic Bond fund held 15 per cent in peripheral eurozone government bonds at the start of the year, but decided to sell out completely in July.

He used part of the proceeds to buy up French and German government bonds, which now make up 7.2 per cent of the portfolio, but the move has dented returns.

“It was a bit of a premature trade; we were expecting a smoother ride,” Mr Brain said.

Portuguese, Spanish and Italian government bonds have outperformed their French and German counterparts in the year to date, according to data from FE Analytics.

Mr Brain’s fund had returned just less than 1.5 per cent to the end of October, but had a tougher time in the short term, losing 0.34 per cent in the three months ending October, according to the latest fact sheet.

While France and Germany recorded positive GDP growth in the third quarter of this year, the two countries have been on a slower-than-anticipated growth path.

This autumn, Germany’s economy narrowly missed falling into a technical recession – which is two consecutive quarters of negative growth.

Its GDP grew 0.1 per cent in the third quarter, narrowly avoiding the spectre of an official recession.

Meanwhile, the French economy grew 0.3 per cent in the third quarter, up from 0.1 per cent in the previous quarter and zero growth in the first quarter, according to data from the National Institute of Statistics and Economic Studies.

In spite of the dent to performance, Mr Brain said he stood by the decision to invest in French and German government bonds, as “core European bonds are a good place to park some money for some time”.

The manager suggested that because of the economic weakness, investors may well take flight to core government bonds as a perceived safe haven.

“Europe is a place to worry about at the moment, and when people are worried they buy bonds,” he said.

Elsewhere, the manager has reduced the risk in his portfolio, cutting down on his emerging markets and high-yield holdings.

At the beginning of 2013, the two sectors made up 50 per cent of the portfolio. Now they make up just half of that. Mr Brain has put that money into government bonds and investment-grade corporate bonds.

His Global Dynamic Bond fund sits in the Absolute Return sector and has the ability to take a negative, or short duration position.

This involves using derivatives to benefit when bond prices fall and yields rise, something that would normally impact bond investors negatively.

But Mr Brain uses it sparingly. At present, he has a ‘short’ on five-year US Treasuries, in anticipation of rate rises by the US Federal Reserve.

“As we move forward over the next two or three years, achieve sustainable growth and have rising interest rates, then we will have more duration hedging,” he said.

However, for the time being he said he thought softening European growth and the possibility of deflation in certain areas demonstrated that there was no need to rush.