A “very surreal climate” has prompted Santander Asset Management’s Toby Vaughan and Tom Caddick to dial down their credit risk as they take a more cautious stance on markets.
A “very surreal climate” has prompted Santander Asset Management’s Toby Vaughan and Tom Caddick to dial down their credit risk as they take
a more cautious stance on markets.
Mr Vaughan said he and Mr Caddick had become more sceptical on where alpha could be generated, following several years of strong returns for a variety of asset classes.
The manager noted that most asset classes were now pricing in negative scenarios, meaning their Atlas Income fund is moving into shorter duration products in the credit space. He said equities were pricing in a global slowdown, while some government bonds were pricing in a recession.
However, he added: “Beta returns are not looking challenged. High yield looks good for two years and equities for three to five years.”
The Atlas Income fund, which uses a blend of active and passive strategies, has now increased its allocation to the Muzinich Short Duration High Yield fund. At the end of December, the Atlas fund allocated 3.9 per cent to the Muzinich vehicle, but this increased through the first two months of 2016.
The Atlas Income fund has also added the Neuberger Berman Short Duration Emerging Market Debt fund. The $607m Ireland-domiciled vehicle invests predominantly in corporate and government investment-grade debt.
“This is us at the lower end of the volatility spectrum,” Mr Vaughan said.
“We will raise risk, but not yet. We want to make sure nothing destabilises the portfolio in the short term.”
In the equity space, Mr Vaughan has purchased the THEAM Quant – Equity Europe Income Defensive fund, managed by Solène Deharbonnier. The new addition, which yields around 7 per cent, now accounts for 4 per cent of the Atlas fund.
Explaining the managers’ wider strategy, Mr Vaughan said: “This is a net closing off of risk and we are feeling a more defensive strategy. We started taking risk off in January and it went down more in February.
“We could be at a stage where financial volatility could to lead to economic changes. [We won’t increase risk] as we’re waiting for credit markets to calm down, US data to come through and other central bank meetings not to cause any surprises.”
The fund’s biggest holdings are still in Tim Rees’ Insight Equity Income Booster and the BlackRock Corporate Bond Tracker fund, which tracks the Barclays Global Aggregate Corporate index.
According to FE Analytics, Santander Atlas Income, which sits in the Unclassified sector, has lost 4.2 per cent over the past year compared with its FTSE All-Share benchmark, which has fallen 9.2 per cent.
Over three years, the fund returned 17.4 per cent compared to the FTSE All-Share index’s 8.5 per cent.