Sanlam Strategic Bond manager Craig Veysey has ramped up his use of tactical allocations in recent months in an attempt to exploit changing inflation and interest rate expectations.
The manager of the £98m fund said he typically dedicated 30 per cent of the fund to tactical plays, with a particular recent focus on the government bond space.
Suspicions that a Donald Trump-inspired ‘reflation’ trade looks overdone have resulted in a particularly active approach in this portion of the portfolio, according to Mr Veysey.
“The fund has been very active this year from a government bond perspective,” he said.
“We have got the reflation theme, which is overextended. My view has been that at some point this is going to be pared back by events that are starting to express themselves within markets.”
Mr Veysey noted that president Trump’s initial failed attempt to push through healthcare reforms, as well as the emergence of geopolitical tensions that have served to distract from domestic affairs, suggested a risk-off move in the markets was on the cards.
As such the manager has kept around 20 per cent in US Treasuries with a tendency to top up on weakness, in the belief that they will benefit significantly later on.
“Should risk market weakness become more pervasive, it is likely that Treasuries will still be a significant beneficiary from their safe-haven status,” he said.
“US Treasury yields continue to offer a relatively attractive unhedged yield advantage versus other core government bond markets.”
The manager has also been active on the duration front as investors adapt to shifting expectations on US interest rate rises.
He initially reduced duration “significantly” in the run-up to March’s rate hike, believing markets were underestimating the risks associated with higher interest rates.
But a rise in yields, prompted by hawkish Federal Reserve comments and developments including the healthcare reform delay led the manager to extend duration.
“We have a short- to medium-duration position in government bonds. When we see yields move higher we add to that duration position, particularly when we see something that might push yields down,” he said.
“Our duration is about six years. We are fairly active in duration. The lowest we would go down to has been four years, since the fund launched eight years ago. The highest we have gone to is 10.”
Mr Veysey said he favoured credit exposure via the likes of beleaguered retailer Tesco over traditional investment-grade debt. The firm was downgraded to high yield at the start of 2015 amid an internal crisis stemming from inaccurate financial reporting.
“If [Tesco] regains its investment-grade status, that would mean investors that follow investment-grade guidelines or buy trackers would become forced buyers, which would push up the price,” he explained.
Mr Veysey also remains a fan of subordinated financials, due to a combination of high yields and relatively low interest rate sensitivity.
At the end of March the fund had 30.7 per cent allocated to banks, with an additional 25.1 per cent in insurance.