In order to reinvigorate their economies and tempt investors to take more risk after the financial crisis, the Bank of England [BoE] and US Federal Reserve have pursued a policy of ultra-low interest rates and this extremely loose monetary policy has been seen as one of the major drivers of risk assets over the last five years.
Performance of indices over 5yrs
Source: FE Analytics
While the two central banks have hinted that they will start to raise rates, no concrete plan has been made available to the market as they say any hikes will be data dependent.
However Doherty, whose £35m fund sits in the offshore universe but will be joining the IMA Targeted Absolute Return sector in January, says rates should go up sooner rather than later – even if the data isn’t forcing the authority’s hands.“There is a paper out by Carlisle at the moment and they are saying a rise in interest rates is actually what we need,” Doherty (pictured) said.
“I have a lot of sympathy with this. They think it could be very positive because if rates were to go back to a normal level, say 2 per cent, in the US and UK for a couple of years and people felt that is normal rate, you might see behaviour normalising.”
“Even if there isn’t an inflationary pressure or an amazing economy that is flying, I don’t see why rates in the UK can’t be at 1, 1.5 or 2 per cent just to stop penalising savers so badly and actually stop appeasing debtors.”
“Debtors have been appeased enormously over the last five years and there is a cost to that.”
The majority of experts expect the Bank of England will begin to raise rates in the early stages of next year and that the Fed will follow suit in the summer.
However, the major risk, according to certain managers, is that central banks leave it too late and have to react to a nasty inflation surprise.
Doherty says the likes of the BoE and the Fed should leave nothing to chance.
“I just don’t think that if they raise rates by 100 or 150 basis points over the next 18 months to two years much would change. People will adjust quickly and, frankly, anyone who can’t afford to pay interest on a loan that is floating rate because rates have gone from 0.5 to 1.5 per cent then they shouldn’t be borrowing,” Doherty said.
He added: “A normalisation where we all feel like a bit of balance has come to the economy is a good thing.”
The manager says the central banks are well aware that they have caused asset bubbles and he also believes that while quantitative easing has recapitalised the banks, it has done nothing for the man on the street.
Therefore to protect his portfolio, which is an absolute return credit fund, Doherty is very short duration – which means he holds a lot of assets which aren’t sensitive to interest rate movements.
However, as longer-dated government bonds – which are quintessentially longer duration – have surprised by rallying so far in 2014 due to being oversold last year and as geo-political risks have mounted, that decision has hurt his Tideway Global Navigator fund’s relative performance.
Performance of fund vs indices in 2014
Source: FE Analytics
“I’ll be frank, that has been a poor choice this year,” Doherty said.
“If we had left our rate hedges off, we would have made another couple of per cent. Ten-year treasuries and 10-year gilts are down to the lows of the year again and we haven’t participated in that, but that could always change.”
“What is weird is that at the start of the year, the consensus was that US long bonds would go from 3.9 to 4.5 per cent and 10 years would go from 2.8 per cent 3.5 per cent and then equities would do really well.”
“S&P 500 aside, equities haven’t done that well and bonds have done really well.”
However, the manager says while he would have liked to generate a higher return this year, he isn’t going to be changing his portfolio.
“If I think about things that have cost me this year, I wouldn’t say I don’t care, but I would say I mind less.”
“That’s because paying for insurance and ending up with a small positive return is one outcome in a scenario. In a world where I expected significant asset price corrections, it doesn’t feel as bad as missing out on upside on an obvious purchase.”
“If you look at the list of things that could have gone wrong or should have impacted on asset prices, there are a lot of them.”
Doherty, who has worked within fixed income markets at Goldman Sachs, Bear Sterns and Bank of America, launched his Tideway Global Navigator fund in September 2011.
According to FE Analytics, it has returned 30.29 per cent and has had a maximum drawdown, which measures how much an investor would lose if they bought and sold at the worst possible time, of 3.66 per cent.
While not necessarily a like-for-like comparison, the IMA Targeted Return sector has returned far less than that but has had a lower maximum drawdown of 1.86 per cent.
Performance of fund vs sector since Sept 2011
Source: FE Analytics
The fund is primarily a fixed income portfolio and one of Doherty’s biggest themes is to focus on investment grade issuers, but invest lower down their capital structure for a higher level of income.
This he, argues, means that he is avoiding the chance of event risk of lowly rated companies. The manager also used equity market futures to hedge against risk in the high yield market.
Tideway Global Navigator has an ongoing charges figure (OCF) of 2.5 per cent.
