Kames duo boosts fixed income after strong fund performance

The top-performing Kames Ethical Cautious Managed team has started using cash built up in 2013 to slowly feed back into the fixed income market as bond yields rise.

Co-managers Audrey Ryan and Iain Buckle have had a very underweight position in fixed income in recent years, but are starting to reallocate to the sector.

The fund, which is a member of the Investment Adviser 100 Club of top performing funds, has delivered the best performance in the IMA Cautious Managed sector in both one and three years, according to figures from FE Analytics.

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Mr Buckle said part of the outperformance had come from an asset allocation decision to move to an overweight position in equities towards the end of 2012.

The fund is a simple equities and corporate bond multi-asset fund and the managers look to keep both equities and bonds at weightings of between 40 per cent and 60 per cent.

While equities have been near the top of the limit for some time now, the managers reduced the bond weighting below 40 per cent in 2013, dropping it down to 36 per cent and leaving the rest of the portfolio in cash.

Government bond yields have risen from the record low levels they had dropped to last year. A rise in yields means prices fall, which impacted those already in the asset class in 2013. However, with yields rising and prices therefore dropping, Mr Buckle said that he had started allocating some of the built-up cash back towards bonds, banking that he can generate enough income to mitigate any more loss of capital value.

He said: “As yields went up, I have been bringing the allocation up to near the 40 per cent level”.

The manager said that he would look to use the cash to bring the bond allocation up further because he didn’t want to hold cash in the fund in the long term because it wasn’t generating any returns for investors.

He said: “I do not expect the bond allocation to be at 46 per cent or 47 per cent this year, but I will gradually add a bit more as yields move higher.”

Mr Buckle said he had been particularly buying financial bonds, although the ethical restrictions on the fund prohibit him from investing in bank issuance.

However, the team will not sell down any of its holdings in equities to fund a move into bonds, although Ms Ryan said she had been making some changes in the equity portion of the fund.

The fund had been tilted heavily towards stocks that were set to benefit from a UK economic recovery and Ms Ryan said she invested very early on in housebuilders.

However, Ms Ryan admitted she was worried by the valuations on the housebuilders because of their strong rally and so had trimmed her stakes in the likes of Taylor Wimpey and Bellway due to fears that they may be “de-rated”.