What role do index-linked gilts play in your fund?
“The reason we hold index-linked gilts is as a safety net really. The equity portfolio, clearly that’s what drives the growth of the portfolio, but it can be volatile. And really the index-links are there to provide stability to the portfolio when the equity market’s a bit wobbly. They also provide protection against inflation, which is always a good thing for any investor.”
“At the moment, the way that they’re valued, they’re quite fully valued really, but they still do the job of actually providing diversification and if we were to get a real upward spike in inflation they would do the job of keeping the real value of the portfolio up as well.”
Are inflation-linked bonds susceptible to rising interest rates?
“I think interest rates going up are going to affect the whole of the bond market, whether it’s corporate bonds or conventional gilts or index-linked gilts. The thing that will probably be the case though it that index-linked gilts should hold up better than the other areas of the bond market because at least the coupons and the principal in an index-linked gilt will still be growing.”
“So whenever RPI is positive the coupon on the principal grows, which is different to an ordinary bond where your coupon is fixed and your principal is fixed. They won’t be immune from the impact of rising interest rates but they’ll fare better than other bonds.”
Will any bonds benefit from rising rates?
“Not really I don’t think. That’s the problem at the moment. The whole of the fixed income market looks really quite fully valued. The effect of very, very low interest rates and QE has really driven yields down to levels that are not really economically very attractive.”
You’ve trimmed your exposure to equities. Why?
“Well one of the reasons that we’ve been selling equities is actually because we have a mandate to stay in equities to no more than 60 per cent of the portfolio. Because the bond market has been reasonably flat and equities have been reasonably strong, we found ourselves up towards that 60 per cent limit. So we had to trim the equities to stay under that 60 per cent remit.”
“Had it not been for the return of cash from Vodafone/Verizon, we would have had to sell a little bit more really because we had part of our Vodafone stake turn into cash which took a bit of the pressure off in terms of the 60 per cent ceiling.”
Where have you put the extra cash?
“Generally we’ve actually kept it in cash. The big problem that we have at the moment, and actually what most multi-asset class managers are finding, is what do you with the money that you can’t put into the equity market because, as I say, bonds don’t look especially attractive. So rather than buying bonds that look fully valued we’ve actually just kept the money back in cash to wait for further opportunities.”
What would you buy if you could buy more equities?
“I suppose in terms of my long-term prejudices of businesses that I like, I do like oil companies, I like mining companies, I like things like pharmaceutical stocks, I like utility companies as well. Those are the areas that I would be looking at. I’m just waiting for the valuations to become attractive.”
“A few other sort of individual companies I suppose. Things like Whitbread who’ve reported today (June 17) who’ve had another set of good results. We like Inmarsat which is a satellite communications company as well.”
“We have a list of businesses that we think are attractive and we’ll just follow them and add when we get the opportunities.”
This video and article were produced in collaboration with and are sponsored by AXA IM.