Columbia Threadneedle multi-asset specialist Toby Nangle has been on the hunt for “decently priced duration” as a source of diversification but fears he could be thwarted by current valuations.
Mr Nangle, who runs the asset manager’s £540m Dynamic Real Return and £23m Global Multi Asset Income vehicles, said he was seeking to build a material position in Treasury Inflation-Protected Securities (Tips) and increase duration as a bulwark against market turbulence. Longer-dated bonds typically rally in the event of equity market turbulence.
However, he fears his attempt to buy inflation protection and diversification could prove ill-fated against a backdrop of high valuations.
“We have had another job of trying to build a Tips position. It looks like it’s going to go the way of the last attempt at the end of 2015,” he said.
“Long-dated yields are positive. Post-Trump, real yields increased. We wanted to nibble and build [a position] at a 1.1 per cent [real yield]. But if it gets to 0.8 per cent we might release them back into the market.”
The manager has been running a small position but taking profits when valuations look too high. And while this approach has been helping to “accrue a lot of performance”, it has come at the expense of diversification.
“In the long run, if you can get decently priced duration, it will correlate negatively or zero to the rest of your portfolio,” he said.
Mr Nangle’s strategy comes at a time when investors appear skittish about duration. In recent months a number of fund houses and asset allocators have focused on short-duration plays, while some investors have dumped index-linked bonds, which tend to be longer-dated, because of interest rate risk concerns.
More generally the manager is maintaining various exposures which have felt “uncomfortable” in recent months, but could play out well in the longer term.
One such position is a weighting of some 8 per cent to Mexican government bonds. The position was initiated in the run-up to last year’s US election, but Mr Nangle added more after the bonds fell in value following Donald Trump’s victory.
“It was part of the portfolio that suffered where others benefited,” he said. “To be increasing the position in this environment seemed extremely uncomfortable, but we took the judgement that a lot of the fear was priced in. Now it has been performing extremely well.”
However, the manager has not been tempted to take profits amid this rally. He suggested the current 7.2 per cent yield seemed reasonable.
“In the range of 7 to 7.5 per cent seems fair – we would expect circumstances to change to push us out of that range.”
More broadly, he has been focusing on some plays that, in his view, look “punchy” in their own right but work well within a portfolio. This includes big exposure to Japan, representing an 11.3 per cent weighting in Dynamic Real Return at the end of February, as well as a focus on commodities and European equities, two areas to which he has been adding.
However, Mr Nangle has kept a large cash weighting – 13.8 per cent of Dynamic Real Return in late February – in the absence of other opportunities.
“It feels it’s appropriate, which is better than buying something just because you look busy,” he said.
KEY NUMBERS
7-7.5%
Yield range within which Mr Nangle is comfortable holding a 10-year Mexican government bond
11.3%
Dynamic Real Return’s Japanese equity allocation
