Read (pictured) says he was caught by surprise by the positive returns on fixed interest this year and was too defensively positioned to take advantage. However, he is maintaining his current positioning, and warns investors this could lead to relative underperformance in the medium term.
“The worry is that it could be a period like 2006 and 2007, when this relatively expensive market grinds on, spreads stay tight, yields stay low and it’s difficult to make a lot of money for people, and being defensively positioned in that market can be painful,” he said.
“So my worries are around defensive positioning in the medium term meaning we don’t participate in the continuing bull market in credit.”
“My job is to manage expectations,” he added. “If you take no risk in these markets there is no return.”
Data from FE Analytics shows that long-dated gilts have outperformed equities this year, making 4.51 per cent to the FTSE’s 3.55 per cent.
Performance of gilts and shares in 2014
Source: FE Analytics
This was unexpected by most commentators, who foresaw a continuing rotation into equities and falling bond prices. Read himself was bearish on bonds as he told FE Trustnet in January.
“Since the consensus view at the end of last year was that rates would be higher, this has contributed to this fall in yields,” he said.
“It has made it quite painful on the other end of the trade and there has been no one left selling bonds out there.”
The manager, who runs his portfolios in tandem with Paul Causer, says that there have been a number of reasons for this development.
“Inflation has been lower than expected particularly in Europe,” he said. “The Fed tapering has been less of an issue in the market because the US budget deficit has been coming down at the same time.”
Read explains that another of the reasons for the rally in high quality debt was that institutional investors such as pension funds will have seen the yields available at the end of last year as quite attractive.
With the US Treasury 10 year yielding 3 per cent it was possible to lock in 4 or 5 per cent for the long term, which many took the advantage to do.
This has been compounded by a lack of sellers in the market, he explains.
Read and Causer’s £5.5bn Invesco Perpetual Corporate bond fund is bottom quartile in 2014, having returned 3.66 per cent.
The managers’ £133m Invesco Perpetual High Yield is also bottom quartile in its sector.
Source: FE Analytics
The £3.9bn Invesco Perpetual Monthly Income Plus, which has a 2 per cent allocation to equities, is third quartile in the IMA Sterling Strategic Bond sector as is the £332m Invesco Perpetual Tactical Bond fund.
The manager says he has been reducing the risk on his portfolios, and one of the reasons for his unwillingness to rethink this approach is concerns about liquidity.
“Liquidity in our markets when you need it will be rubbish,” he said.
Much of the bond market is over-the-counter rather than traded on a public exchange, meaning that it is often hard to find a seller in times of market stress at a price you find acceptable, he explains.
An example of this phenomenon was seen during last year’s sell-off in emerging market bonds, he adds.
“Liquidity in credit markets can be very hard at times, and we have to be prepared for that,” he said.
Read’s funds have performed exceptionally well over the full market cycle, according to data from FE Analytics.
The manager has returned 89.3 per cent over seven years compared to just 45.5 per cent from his peer group composite.
Performance of manager vs peer group over 7yrs
Source: FE Analytics
Read says that he expects interest rates to rise in the UK and US early next year, with Carney likely to be first in February, not too close to the election.
While he praises the actions of the ECB, he says that structural reform of Europe’s economies is necessary for any lasting recovery.
He agrees with his Invesco colleagues Stephanie Butcher and Jeff Taylor that these reforms are underway.
