Rathbones’ Bryn Jones has stood by his contrarian defensive bet on government debt in his Ethical Bond fund, in spite of admitting he had been “too early” with the call.
The fund manager said there was a disconnect between the US government bond market and US Federal Reserve data, which suggested interest rate rises were not being fully priced into government bonds.
Mr Jones said he expected the first rate rise to come from the Federal Reserve in June, which was hinted at by chairman Janet Yellen in her biannual testimony to the US Congress last week.
Ms Yellen said the Federal Reserve would not raise its base rate for “at least the next couple” of its Federal Open Markets Committee (FOMC) meetings; June will be the third meeting from now.
Mr Jones said he had shifted his portfolio to a short duration position last year, which meant it would be less exposed to movements in interest rates.
Government bonds traditionally fall in value when interest rates go up, and the shorter duration a fund has the less money it should lose. But government bond yields have instead continued to rally.
Mr Jones said: “We went defensive too early on duration. We were set up to protect against an interest rate rise.”
He said he had been adding duration at the start of 2014 because of his view that UK and US government bonds would rise in value.
He then reduced that position throughout the year, which held the fund back as bonds continued to rally.
“We had been actively buying duration, but then we started selling duration as yields fell because we felt by looking at economic data [interest rates] might rise,” Mr Jones said.
“However, as the year went on and then we heard that European quantitative easing was coming, we started adding back. So while structurally we were underweight, tactically we were starting to add duration.”
In spite of missing out with his “early” defensive move, data from FE Analytics showed the Rathbone Ethical Bond fund had delivered top-quartile performance of 38.2 per cent in the past three years to January 31, compared with its Investment Association Sterling Corporate Bond peer group’s 27.2 per cent.
In addition to his short duration bet, Mr Jones said he was also cautious of investing too much in high-yield bonds, which he claimed were still “overvalued” in spite of a sell-off in the second half of 2014.
He said the high-yield sell-off – in US distressed debt, contingent convertible bonds, European and US high-yield and corporate hybrids – had been driven by “tourist” investors.
He thought these investors had been encouraged into high-yield assets by quantitative easing but had abandoned the assets at the first sign of monetary tightening.
Rather than high yield, Mr Jones has some unrated positions, such as some tier 1 banks, John Lewis and insurer Beazley.
He also has 12.8 per cent in uncorrelated assets, such as floating-rate notes, cash and mortgage-backed securities.