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Threadneedle Dynamic positioned against interest rate risk

Threadneedle Dynamic positioned against interest rate risk

Bank base rates may rise as early as August, prompting Toby Nangle, manager of the Threadneedle Dynamic Real Return fund, to take a defensive positioning against UK interest rate risk.

The £1.4bn fund, which he has run since its launch in June 2013, has been taking cautious positions in short-dated securities, largely as a hedge against what Mr Nangle believes to be an imminent interest rate rise risk.

He said: "We have quite a large proportion of short-dated corporate bonds in the portfolio, as these are a reliable, low-volatility addition to the portfolio.

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"They are not exciting, and won't make people rich but they serve as a good anchor, especially when it comes to interest rate risk."

He said while the team did not expect any 'significant' rate rises, he does expect incremental rate rises, starting this August.

Mr Nangle said: "This is not because the UK is experiencing strong levels of growth, and any poor Brexit outcome could see the rises reversed or eliminated. 

"But the UK, as a highly developed economy, has a useful bond market for policy makers. It allows central banks to run counter-cyclical monetary policy and I believe over the next decade, one could hypothesise any monetary policy could be put at risk by courses of action the government may or may not take."

The portfolio has an 18.5 per cent holding in the Threadneedle Sterling Short-Dated Corporate Bond fund. 

However, he said he did not believe the tightening of quantitative easing [by central banks] would lead to a bond bubble bursting, as "we don't think there is a bond bubble".

He said: "The historically useful characteristics of holding longer-dated government bonds do not really have a place in today's mixed-asset portfolios. The 35-year bond bull market seems to have run its course and we are now in a more choppy, sideways-moving bond market."

Despite his view on government bonds and interest rate risk, Mr Nangle said the fund - which has outperformed its peers in the UK IA - Targeted Absolute Return sector over the past five years - was not shifting away from risk assets, however. 

He said: "We still have a fairly constructive view towards risk assets – although there are a few caveats. One is the impact that a growing trade war might have on company level earnings.

"I think we are seeing the potential beginning of a bear market in PE ratings but if this can be offset by a continued rise in earnings, this is not necessary a bad thing – you are locking in valuation without giving up earnings growth.

"What brings us to an end is if future cash flows stop going up or start going down and this is not on our horizon right now."

The fund returned 5.1 per cent over the past five years, compared with the sector median return of 2.1 per cent (bid-to-bid, net returns readjusted, according to Morningstar. Data as at 30 June).