Multi-managerMay 13 2013

Rathbones’ Coombs issues fixed income warning

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Rathbone Unit Trust Management’s David Coombs has warned that advisers should reassess the capacity for loss of clients invested in bond funds as prices across government and corporate markets continue to rise.

It comes as investors have been putting pressure on Mr Coombs to increase the yields on his three multi-asset funds, which he has so far resisted in order to keep the funds’ risk profiles consistent.

The manager has sold out of all investment-grade holdings in his £59.7m Rathbone Strategic Growth fund and is close to making the same move in his £46.8m Rathbone Total Return fund after becoming concerned that much of the investment-grade market was yielding less than the rate of inflation.

Bond prices move inversely to yields which means as bonds get more expensive, the yield falls.

“The trigger for bond outflows will be bad nominal returns,” Mr Coombs said. “The Financial Conduct Authority has made a big thing about investors’ capacity for loss.

“At some stage bonds will make a loss and it could have quite a nasty effect, and I’m not sure how sophisticated some marginal bond investors are.

“People have taken on more risk to maintain yield and when [bonds] start to unwind it could be nasty. I suspect there will be an accident there somewhere.”

During a review of the Rathbone Strategic Bond fund, which Mr Coombs co-manages with Bryn Jones, the managers sold out of a BBB-rated bond, the lowest rating for investment-grade bonds, as it had a negative real yield after factoring in inflation. Mr Coombs said this was a trigger for his review of all investment grade holdings in his three multi-asset funds.

He has also reduced exposure to emerging market debt and high yield bonds, although he has increased holdings in gilts and US treasury bonds in order to dampen the volatility of his equity holdings, to all-time highs.

Elsewhere, Mr Coombs has sold out of Richard Plackett’s £1.6bn BlackRock UK Special Situations fund after Mr Plackett upped exposure to large caps, changing the fund’s profile according to Mr Coombs’ volatility-led investment process.

Instead the manager has bought into Paul Marriage’s £437.8m Cazenove UK Smaller Companies fund, one of the top-performing portfolios in the IMA UK Smaller Companies sector.

He has also bought the £933.6m Cazenove European fund, managed by Chris Rice. This was the Rathbones funds’ first European equity holding for nearly two years, Mr Coombs said, which he bought for its exposure to “early stage cyclicals”.

The Rathbone Strategic Growth fund has gained 43.6 per cent since its launch in June 2009, while the Total Return fund gained 37.1 per cent in the same period, according to FE Analytics.