Artemis’s James Foster has stood by his decision to short UK government bonds post November 2016, adding to the position despite it continuing to hamper his fund’s performance.
Mr Foster – manager of the £1bn Artemis Strategic Bond vehicle alongside Alex Ralph – said he had increased his short position in gilts in February, even though the 10-year gilt yield dropped 20 per cent to 1.151 per cent over the month.
The short positions were implemented across his Strategic Bond and Monthly Distribution funds in the aftermath of Donald Trump’s election win – which saw an almost immediate steepening of government bond curves in the US, UK and Europe.
Unlike their US counterparts, UK bond yields have since fallen back and are now close to the same level as the US election day. The Bloomberg Barclays Sterling Gilts index has gained 2.9 per cent since Mr Trump’s victory.
Mr Foster said: “We increased our short position in gilts through [February], and this is costing us some performance in the short term.
“We were disappointed by the outperformance of gilts, but we remain convinced that our short position will be rewarded as rising inflation and higher interest rates emerge.”
Mr Foster said the US rate rise – and scaling back of quantitative easing (QE) in the US and UK – would eventually see yields rise again across the board, allowing the short positions to prove worthy.
Downward pressure on European yields was also unsubstantiated with the market overestimating political risk, the manager added.
While UK gilt yields tend to follow their US counterparts, 2017 has proved difficult for managers attempting to seek rewards in such a play. The divergence has only grown starker since the US Federal Reserve hiked its base rate in March for the second time in four months.
The 10-year UK gilt yield was also unperturbed by higher-than-expected inflation figures in the latest reading. The surprise 2.3 per cent figure on March 21 did not stoke up yields as would be expected, with the figure having fallen since.
While shorting government bonds, Mr Foster said he continued to reduce duration in the fund using both short-duration vehicles and futures overlays. He was also increasing his strategy’s exposure to banking debt.
“There is a new bias towards the portfolio there and much greater weightings. I have always been a fan of banks but more so at the moment,” he said.
Mr Foster said with expectations for QE unwinding in the US, short-term interest rates in the US as measured by 3-month Libor were now more than 1 per cent.
“Clearly the profitability of banks is markedly higher, and as a result their bonds are doing well, [as are] other areas of financial services,” he added.
The manager was more philosophical on adapting the fund in an environment of rising, yet diverging, interest rates.
“It’s becoming more of a special situations funds,” he said.
“There are more special situations than we’ve had in a long time, rather than blanket ownership of a large spectrum of bonds that could come under pressure when people get more concerned about the market in the future.”
