Fixed Income  

US bond position hits Milburn fund

Kames Capital’s bond manager Phil Milburn has said being underweight US government bonds hurt performance in the £663m Kames Strategic Bond fund during the asset class’s recent rally.

Mr Milburn, who manages the Strategic Bond fund with David Roberts, increased his exposure to the asset class in August during a sell-off but remained underweight which meant when US Treasuries rallied in September his fund missed the full impact of the rise.

The asset class rallied after the Federal Reserve decided not to reduce its bond buying programme, known as quantitative easing, in spite of the central bank leading the market to believe that it would start to taper its purchases.

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But the manager decided to reduce his weighting to the asset class further when yields, which move inversely to prices, rallied back to 2.7 per cent.

Mr Milburn said he was also considering re-implementing a negative bet on emerging market sovereign bonds, which would gain money if the bonds dropped in value.

The manager removed this trade in July following the huge sell-off in emerging market debt in May and June, which had meant the short produced strong returns for the fund.

Mr Milburn said he planned to implement the bet by purchasing a 5 per cent ‘short’ position on the CDX Emerging Market index of sovereign bonds.

Elsewhere, the manager said he wanted to raise his emerging market corporate bond exposure to 5 per cent and had looked at opportunities in Mexico to boost his exposure to that figure.

Such moves are tactical trades, though, and Mr Milburn said he remained committed to his strategic view of looking to add value through the 50 per cent weighting to investment grade debt in the portfolio, along with a 20 per cent net position in high yield, mainly in the US.

He said performance had been hit this year because he had not taken on enough credit risk, and the fund is currently in the third quartile of the IMA Sterling Strategic Bond sector in the past one and three years.

However, the manager said the strategy was not to take on too much market risk in any area, which he said meant he would rarely be top or bottom quartile, and he said he had been particularly pleased with the low volatility of the fund so far this year.

Another area the manager said he had looked to add to in the fund was US non-agency residential mortgage backed securities, which he said was his “favourite part of the market right now”.

The asset class currently makes up 5 per cent of the fund but Mr Milburn said he had been trying to raise that to 10 per cent in the past few months but was unable to do this because of a lack of available securities to buy.

RMBS shake off old stigmas

Residential mortgage backed securities (RMBS) have become an increasingly popular asset class for investors as they shrug off the stigma attached to them, especially in the US, from the financial crisis, when the private RMBS market collapsed due to its connection to sub-prime mortgages.