Liontrust’s John Husselbee has increased exposure towards hedge funds and absolute return vehicles in his multi-manager range at the expense of fixed income.
The manager has also removed all sterling hedges in the portfolio as currency weakness takes its toll.
Mr Husselbee said he still held concerns over the long-term health of bond markets, prompting him to make the shift. The multi-manager range now has an overweight position in both hedge funds and absolute return funds while being underweight fixed income.
He added that bonds had been overvalued for years and current levels could not be justified.
“With 10-year gilts yielding less than 1.5 per cent and the Bank of England mandated with a 2 per cent inflation target, the potential negative real return is not attractive long term,” he said.
Hedge funds and absolute return funds, such as the Pyrford Global Total Return, are the latest preference in the portfolio. Mr Husselbee added that he preferred the low correlation to traditional equity and bond markets.
He said the chosen hedge funds should enhance returns through global macro strategies, while the absolute return vehicles, such as market neutral strategies, should help to lower risk in his portfolio.
“As investors, we are seeking alternative sources of return in the search for further diversification in terms of both income and capital growth,” he explained.
“We have increased weightings in hedge funds and absolute return funds rather than leave excessive amounts in low-yielding cash deposits.”
The manager said he had added in strategic bond funds to complement traditional vehicles.
Mr Husselbee has also moved away from sterling-hedged share classes due to volatility in currency markets and uncertainty surrounding a potential UK exit from the European Union (EU).
The manager removed all sterling hedged positions from the fund range as he felt there was “no point in having them until we have some clarity”.
Sterling has weakened significantly this year, and this weakness is expected to continue as the UK nears its EU membership referendum on June 23.
“At this stage I don’t see why you’d have a sterling hedge on anything,” Mr Husselbee said.
However, the referendum isn’t the sole factor regarding sterling’s recent weakness. Loose monetary policy and the ongoing presence of historically low interest rates has continued to push down the value of the currency.
“Sterling has weakened, not only because of the uncertainty of the Brexit referendum, but because a lift-off of UK base rates has been delayed further,” he said.
“We prefer to invest in global equities on an unhedged basis while the trend remains towards sterling weakness. This is under constant review, particularly with regard to the euro and yen, where central bank monetary policy is travelling [towards looser territory].”
