Investors are all too aware of the dangers of the bond markets these days, as prices of investment grade corporate credit and sovereign debt are at all-time highs and yields historically low.
This has caused many experts to question the wisdom of holding such assets, as bond holders are already facing negative returns on their investments, with a rise in interest rates or inflation likely to make the situation even worse.
However, Borrows, who manages the £153m CF Miton Distribution multi-manager fund, says investors who hold only equities and ditch bonds altogether would be putting their portfolios at serious risk, particularly if the economy falls into a deflationary period.
"The important point to make is that none of us know what will be the outcome from this great experiment we are seeing," he said.
"We are in an inflationary environment, but deflation is still a possibility and in that case fixed income would look attractive."
"Although we don’t sit in the 'deflation camp', no-one can be sure as to what will happen further down the line," he added.
Borrows admits he is forced to hold bonds given the sector the fund sits in, but says that this provides valuable protection.
"We are constrained as our fund is in the IMA Mixed Investment 20%-60% Shares sector, so we must have at least 30 per cent in the asset class or cash – but then cash is not an option for an income fund," he said.
"Therefore we have to make the best of a bad situation, if you like, and we do this by having high exposure to very short-duration bond funds and strategic bond managers."
Borrows has managed the CF Miton Distribution fund since its launch in April 2002. Richard Parfect joined as co-manager in July 2010.
According to FE Analytics, the fund has returned 82.12 per cent over 10 years while the IMA Mixed Investment 20%-60% Shares sector has made 78.26 per cent; however the fund has been considerably more volatile over the period.
Performance of fund vs sector over 10yrs
Source: FE Analytics
CF Miton Distribution is a top-quartile performer over one year, with returns of 20.38 per cent.
The fund has a headline yield of 5.44 per cent and Borrows currently holds 47.4 per cent of the portfolio in the equity market.
Borrows must hold at least 30 per cent in bonds and is currently sticking close to that limit, at 30.8 per cent of AUM.
The manager says it is important to hold funds that are short in duration as any hike in interest rates or inflation could cause a huge sell-off in the fixed income market.
"One of the main reasons for having a high exposure to short duration is because we don’t want inflation and interest rate volatility risk within our fund."
"Although we don’t expect interest rates to rise in the next 18 months to two years, we want to protect ourselves from the worst ravages of inflation."
"However, if growth was to resurface from all the central banks' quantitative easing measures, then interest rates would rise, so we would prefer to be holding short-duration funds."
"It is really to maintain a defensive portfolio, but also with short duration you are naturally able to hold until maturity and then re-finance when yields rise."
"It gives the fund much lower volatility and at the short end of the bond market there is significantly less chance of default," he added.
The manager says he can still find good yields in that part of the market.
"In terms of yield, you can still find 5 to 5.5 per cent from short-duration funds," he said.
"We like the AXA Short Duration High Yield and the Muzinich Short Duration High Yield Bond funds, but we have also started buying and regularly topping up our exposure to the Royal London Short Duration Global High Yield Bond fund."
"We still feel that some strategic bond funds look attractive and we hold Legg Mason Global Multi Strategy Bond and L&G Dynamic Bond. However, we have been taking some money out of non-short duration high yield fund," he added.
Royal London Short Duration Global High Yield Bond is one of his most recent purchases.
The fund – which sits in the FCA offshore universe – is managed by Azhar Hussain and was only launched in February this year.
So far it has returned 1.87 per cent while its Libor GBP 3m index benchmark has made 0.14 per cent.
Performance of fund vs index since Feb 2013
Source: FE Analytics
The fund currently holds just conventional corporate credit and has no exposure to alternative investment strategies such as derivatives.
However, 100 per cent of Hussain’s portfolio is set to mature over the next five years.
Royal London Short Duration Global High Yield Bond has an ongoing charges figure (OCF) of 1.05 per cent and requires a minimum investment of £1,000.
CF Miton Distribution has an OCF of 1.98 per cent and requires a minimum investment of £3,000.
