Nick Hayes tries to shield fund from market turbulence

Mr Hayes said 2015 had been “a dismal year so far for fixed income”, in spite of bond returns holding up better than some had feared.

The manager’s fund has notched up a return of 0.5 per cent year to date, compared with the average loss of 0.2 per cent by IA Sterling Strategic Bond sector, data from FE Analytics shows.

The IA’s Global Bond sector has endured a 2 per cent loss, while the typical IA Global Emerging Market Bond fund has shed 7 per cent, primarily due to the threat of tighter monetary policy in the US.

“It has definitely been a much more difficult environment,” Mr Hayes said.

“Following the slight relief seen in July, August has proved difficult as credit spreads widened and gilts saw significant volatility.”

The manager has been raising duration as a result, and struck a note of caution over the outlook for fixed income.

He noted that even the appeal of gilts as a safe haven waned towards the end of August.

“Global bond markets have had a difficult few months, with only a brief respite in July before renewed pressure in August,” Mr Hayes said.

“The markets have turned their attention away from the Greek political and economic saga, and are focusing on both a lower oil price and potential interest rate rises in the US and the UK.”

He added that recent portfolio activity had been “fairly limited” as a result, given the wider backdrop of increased market volatility brought on by concerns around China’s economy.

“We bought a new bond issue by InterContinental Hotels Group, and sold some bonds in the banking sector,” the manager said.

“In terms of fund positioning, we built small overweight positions in credit and duration, relative to the comparative benchmark.”

Mr Hayes, who also runs the Axa World Funds Global Strategic Bonds fund, is paying particular attention to the data coming from China, given that the country’s shift towards an economic model of lower growth has had repercussions elsewhere.

“It is an emerging markets event but it is having a much wider impact,” he noted.

“The weakness in commodity prices also has repercussions on other asset classes.”

As a result, the slowdown in the world’s second-largest economy has had implications for the positioning of his global portfolio in particular.

The manager had in recent months favoured nominal bonds at the expense of inflation-linked bonds, “as they are likely to outperform as inflation expectations weaken”.

Mr Hayes added: “Prudent bond selection in US high yield remains critical, given the large energy component – at 13 per cent – within this asset class.”

While he thought there might well be a pick-up in defaults as a result of monetary policy tightening, he said that this had been priced into the US market.

However, the manager has maintained a zero allocation to local currency bonds within emerging markets, “where volatility remains high and government intervention in currency markets is difficult to predict”.

The bulk of Mr Hayes’s fund continues to be held in higher rated debt. AA-rated securities made up 67 per cent of the portfolio as at August 31, with higher-yielding BBB bonds accounting for 21.5 per cent.

The manager’s top-10 holdings are all UK gilts of varying durations.