LGT Vestra has ditched all conventional fixed income holdings from its model portfolio range after completing a shift to inflation-linked bonds.
Meena Lakshmanan, a partner at the firm, said her team had been adding to Treasury inflation-protected securities (Tips) over the past 18 months, accelerating purchases in May and again this autumn as inflation expectations began to rise.
Recent months have seen investors grow more convinced inflation is set to return to developed markets, in part as a result of governments’ increased focus on fiscal stimulus. This has in turn caused traditional fixed income assets to sell off – particularly after Donald Trump’s US presidential election victory earlier this month.
Ms Lakshmanan said: “Around May we started increasing linkers. Over the past two months we [have] pulled all the conventionals and moved them to linkers, because of where we saw bond yields and our inflation expectations.”
As well as Tips, the model portfolios also include funds that invest primarily in inflation-linked assets, such as Standard Life Investments’ Global Inflation Linked Bond fund.
Mr Trump’s imminent arrival has also seen Vestra increase its allocation to equity funds focused on the country, such as the Schroder US Mid Cap fund.
The US economic environment should remain stable despite the potential that interest rates could rise under a Trump presidency, Ms Lakshmanan said. She added that the US would remain in a “sweet spot” as long as rates stayed below 3 per cent.
“Very high interest rates are not good, but if rates are rising because of normalisation as opposed to tightening of credit conditions, then it is a good environment. It’s been eight years and we’re talking about rates going up because of normalisation; so from that perspective it’s quite decent,” she said.
Elsewhere, UK equity exposure – primarily to FTSE 100 companies through funds such as Lindsell Train UK Equity and Threadneedle UK Equity Income – was topped up ahead of the UK’s EU referendum on the view sterling would depreciate following the vote.
But since then the team has held back from making further changes.
Although the UK economy has surprised many analysts following the Brexit vote, Ms Lakshmanan voiced concerns about the path of domestic growth in the future.
She said uncertainty over EU exit negotiations once Article 50 is triggered next year, along with rising inflation putting pressure on the spending power of consumers, had made the team cautious.
“Going ahead it will be interesting to see whether the UK economy has delivered [relative to] expectations. The question is whether the sustainability of the growth will be there,” she said.
“It looks less likely to be sustained at the levels we have seen post-Brexit, because the currency is weak and inflation is trending up and obviously there’s going to be squeezes on the consumer.”
Ms Lakshmanan added that the risk of further sterling devaluation had “not abated fully”, and that one of the key points for investors to consider in the coming year would be continued sterling weakness.
Domestic investors “will see more of a downside on sterling before we see an upside,” she predicted.
