Perhaps the biggest quandary faced by income portfolio managers right now is that bond yields have moved to levels where they can offer most of the portfolio income required, but it’s happening in the context of very high volatility and indeed price falls.
A glance at our income database indicates the DFMs we cover have made up their minds regarding which side of that risk/reward ledger they favour, with an influx of buyers into gilt funds so far in 2023.
The L&G All Stocks Gilt Index fund is now owned by four of the income portfolios we monitor, having picked up three new buyers since the start of 2023.
The Allianz Gilt Yield fund and iShares Gilts All Stocks Index are each owned by three of the income portfolios we monitor, each having found one new buyer in 2023.
The average exposure to government bonds in the income portfolios we monitor is currently 6.8 per cent, but with a very wide delta indeed.
Premier Miton, Brooks Macdonald and Hawksmoor are among the houses with zero allocated to this asset class, while Rathbones and Brewin Dolphin are sharply skewing the distribution in the other direction with allocations to government bond funds of respectively, 21 per cent and 16 per cent, while Iboss are on 9 per cent.
But if demand for conventional gilt funds has risen sharply in 2023, DFMs are more circumspect on the prospects for index-linked bond funds.
Since the start of 2023 there have been three sales of these funds among the allocators we cover, compared with just one buyer.
The most-owned linkers funds among the allocators we cover are the Sanlam Global Inflation Linked Bond fund and a pair of passive funds, the L&G Global Inflation Linked Bond Index fund, and the same firm’s L&G Index Linked Gilt strategy, all of which appear in two of the income portfolios we monitor.
The average exposure to index-linked funds in the income portfolios we monitor is 47 basis points, down from 97 basis points in June, perhaps because the yields on conventional bonds have risen so stoutly at the same time as inflation expectations moved downwards, perhaps creating the perfect storm for linkers to underperform.
Recent turbulence in conventional bond markets has to an extent been the consequence of markets repricing their rates expectations, which may impact sentiment towards linkers funds in the coming years.
