Barings fund doubles US high-yield positions

Barings fund doubles US high-yield positions

The Baring Multi-Asset fund has more than doubled its exposure to US high yield this year in expectation of a cautious US rate rise programme.

High yield now accounts for 14 per cent of the £167m fund, up from 6 per cent in January, a position that excludes oil and energy and has a bias towards shorter duration holdings.

Fund manager Christopher Mahon referred to the asset class as offering “equity-like returns but with a lot less risk”.

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“Given our constructive views on US and global economies, we suspect spreads and yields will come in tighter,” he said.

“We don’t think the Federal Reserve will hike aggressively so we don’t think one of the main risks to high-yield bonds will transpire.”

Mr Mahon expects the Fed to raise rates in June and December and, if the economy continues to look strong, potentially in September, believing that increasing rates “confirms that the world is in a good place”.

Mr Mahon’s portfolio now has two high-yield funds in its top-ten holdings, with 7.2 per cent in the Neuberger Berman High Yield Bond fund and 3.3 per cent in Axa IM’s US Short Duration High Yield vehicle.

He has also adopted a bullish stance on China despite voicing concerns that the country’s growth is driven by credit. The manager has built a position in the country over the past two months within the fund’s total 6 per cent allocation to emerging markets.

He said: “I am concerned [about credit-fuelled growth], but it will be something to be concerned about next year rather than this year. What they’re doing is so big that you just don’t want to stand in the way of it.”

The manager noted that, although stimulus in the past had been directed primarily into financial assets such as property and speculation, this round of credit financing is going towards “real activity”, such as construction, rail freight and electricity.

Conviction on China pushed Mr Mahon to sell out of the fund’s 3 per cent holding in gold bullion, which was only initiated in January, in order to shift the position entirely into silver.

“One of the reasons we sold gold is that we think if we are right about our economic view where China is coming back, that means the Federal Reserve will be able to lift interest rates. Under that type of scenario, gold would start to come under pressure and we want to be out of that type of asset class.”

While he said uncertainty over rate rises would not be an issue for equity markets, Mr Mahon hoped for a clearer attitude from Fed chairwoman Janet Yellen so as not shock bond markets.

Alongside its high-yield holdings, the multi-asset vehicle has 8.1 per cent in US Treasuries.

“What Janet Yellen is going to have to do is talk to the bond markets a lot more, she’s going to have to do more speeches and communication so that the bond market is anticipating what she is going to do on the day that she does it. She has quite a lot of work to do.”