Mr Godley and Martin Price, co-managers on the £167m Sarasin Sterling Bond fund, had reacted to June’s Brexit vote by beefing up a “defensive” position outside of the UK and buying Treasury inflation-protected securities (Tips), doubling the fund’s non-sterling exposure to around 10 per cent.
“We had a defensive position outside the UK that we increased after the vote. That has done exceptionally well and has outperformed other government bonds,” Mr Godley said.
However, the managers have since taken profits – bringing non-sterling exposure back down to roughly 5 per cent – and believe more could be allocated either to emerging markets or gilts.
“We have been talking about emerging market debt,” Mr Godley said. “This would be local currency debt, buying exposure to both the interest rate cycle and the currency. We think US rates are going to normalise slowly, so we would not expect emerging markets to suffer as badly as in previous times.”
The managers already have a small position of around 0.5 per cent in India, and could focus on other countries in the throes of reform, such as Indonesia.
Mr Godley – who is also considering local currency debt provided by supranational bodies such as the World Bank – also expressed interest in Brazil’s economy, which he said “has started to turn the corner”.
Meanwhile the team, which has 41 per cent allocated to gilts, could put a “little bit more” here, funded either by selling dollar exposure or taking profits on strong corporate performers.
“Gilts have sold off and are starting to look a little better value. They are going to be more volatile than international neighbours,” Mr Godley said.
“[The market] is a bit more nervous but the Bank of England is purchasing, which should provide a reasonable level of support. We had considered the fact we might get to 1 or 1.2 per cent [on the 10-year gilt yield]. But we thought that would be in the early part of next year rather than now.”
On the corporate side the manager is favouring infrastructure companies, and has initiated positions in National Grid and housing association Places for People.
Mr Godley noted on the latter: “Most housing associations offer secured debt. This isn’t the case here so it came at an attractive price. But it’s a regulated, not-for-profit business. It stalled a little in development but not to an extent that is worrying.”
He is also among the managers favouring subordinated debt from financials, with holdings including Barclays, Coventry and Nationwide.
“There’s still a lot of yield over there, though they tend to be quite volatile,” Mr Godley said. “They can move around a percentage point at a time.”
He added that he had eschewed a large amount of post-referendum issuance. “I avoided a lot of the issues that came in the flurry of activity post-Brexit, because some were based on the fact there was a mad scramble for paper and I saw no value at all,” he said.
“Vodafone and WPP did some incredibly long deals. We like WPP as an advertising firm, but not for 30 years. I assume there’s going to be some [business] cycles in the next few years.”
The Sarasin Sterling Bond fund has returned 20 per cent over three years, compared with 14.3 per cent from its IA Sterling Strategic Bond peer group, data from FE Analytics shows.
