Safe haven government bond yields will be “materially higher” in the next 12 months, according to Alliance Trust’s Gareth Quantrill.

Quantrill (pictured), co-manager of the £230.3m Alliance Trust Monthly Income Bond fund, predicts yields on UK gilts and US Treasuries will reach 2.5 per cent or more within a year. 

"As soon as we start to see positive signs of growth, then you’re going to see significantly higher yields," he said. "We expect yields to be materially higher on gilts and treasuries in the next 12 months." 

Quantrill points out bond yields have risen by 50 basis points since July, and predicts a similar movement in the next year. 

As a result, he says credit quality and default risk is no longer the biggest concern facing fixed interest investors. 

The manager’s Alliance Trust Monthly Income Bond portfolio was highlighted in a recent FE Trustnet article for its high degree of exposure to BBB rated and sub-investment grade debt. Bond managers have had to look further down the quality spectrum to prop up their level of income. 

However, Quantrill says looking at the credit rating alone is misleading and he urges investors to rethink their view of risk. 

"Clients shouldn’t get too much comfort from being in the highest-quality assets because that’s where we see the biggest potential losses," he explained. 

"We think in the current environment that’s going to potentially lead you to the worst outcomes over the next 12 to 18 months." 

"If your spread has nowhere further to contract, when gilt yields start to rise you will feel the full impact of those negative movements." 

Quantrill admits he is looking for higher yielding bonds to add to the portfolio but he disagrees that these holdings should be viewed as higher risk. 

"We are looking for bonds that would allow us to maintain an attractive level of income and ignoring areas that supress yield," he said. 

The Alliance Trust Monthly Income Bond fund, which Quantrill runs alongside Stuart Steven, is currently one of the highest yielding funds in the IMA Sterling Corporate Bond sector, at 5.52 per cent. 

The sector average is 4.55 per cent, according to FE data. 

Performance of fund since launch vs sector and benchmark 



Source: FE Analytics

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Quantrill’s overweight in high yield debt was reflected in the fund’s volatility and underperformance during last summer’s market sell-off. 

According to FE data, it has returned 16.4 per cent since its launch in June 2010, falling short of both its sector average and benchmark. 

It has by far the highest annualised volatility of all the portfolios in the IMA Corporate Bond sector over two years, with a score of 8.79 per cent. 

Quantrill says the fund is significantly underweight utilities at present, because he feels spreads are “at an all-time tight” and do not have the potential to outperform. 

Alliance Trust Monthly Income Bond has a minimum investment of £5,000 and an annual management charge (AMC) of 1 per cent. The fund’s total expense ratio (TER) is 1.18 per cent.