Investors should not hold their breath waiting for central banks to begin hiking interest rates aggressively, according to Royal London Asset Management’s Eric Holt.
FE Alpha Manager Holt, who oversees the £1.7bn five FE Crown-rated Royal London Sterling Extra Yield Bond fund, said the rate hiking cycle is unlikely to accelerate anytime soon.
Although the Federal Reserve increased the Federal Funds Rate in March this year by 0.25 percentage points to 1.75 per cent in March, other central banks have not followed suit.
The Bank of England (BofE) had been widely expected to increase rates in May for the first time since last November, however, weaker economic data prompted the Monetary Policy Committee to hold off.
Investors have anticipated more normalisation of monetary policy a decade since the start of the financial crisis saw the onset of a low rates and quantitative easing (QE) regime.
Indeed, the Fed has already begun to withdraw support, while the ECB has confirmed that its asset purchasing program will run to at least September this year but is no longer looking to increase it.
However, Royal London’s Holt said interest rates will stay lower for longer adding that investors shouldn’t expect rapid changes to monetary policy.
Holt feels that rates should be higher in a normal monetary policy environment but said: “I wouldn’t hold your breath waiting.”
Short term interest rates since August 2008
Source: Organisation for Economic Cooperation and Development
The BofE cut the bank rate in 2016 following the EU referendum to 0.25 per cent to reassure later raising it to 0.5 per cent in November.
Yet, the FE Alpha Manager said he doesn’t think there is much significance to the rate hike last year.
He explained: “I wouldn’t read too much into rates going up again to half a per cent. We’re still in a period that’s approaching a decade now with low interest rates.
“The economy moves on some relatively poor data and it’s easier then to sit on your hands again,” said the Royal London Sterling Extra Yield Bond fund manager.
“I don’t see that environment changing, which is unfortunate in some ways because you would want the ability to take monetary action if the economy turns down.
“And at the moment, you haven’t got that through interest rates, you’ve got the potential of it through QE.”
So where does this leave investors looking to make a return in fixed income markets?
“On monetary policy, I think the situation with the US is quite interesting and I think the US undoubtedly has trodden a fairly lonely path in its interest rate moves,” he said.
While Holt sees the yields in the US market as attractive thanks to US 10-year Treasuries reaching 3 per cent, he warned not to rely on these yields for future gains.
US 10-year Treasury yield over 1yr
Source: Bloomberg
“US 10-year yields are about 3 per cent no matter where you look on the curve and that in itself gets a bit of attention in terms of what’s that signalling. I’m not sure that’s signalling anything, it’s just a marker,” said Holt.
“But it does make yields more credible, that level of yield does feel orientated towards what we would normally think of as value.”
Turning to the UK, the bond fund manager isn’t feeling particularly bullish.
“I’m not inclined to invest my money at one and a half per cent for 10 years with inflation where it is,” he said.
Inflation in the UK fell to 2.5 per cent in March, the lowest since the same time last year. While it is moving towards the 2 per cent target after hitting a peak of 3.1 per cent at the end of last year, this is still relatively high.
Additionally, Holt said markets haven’t begun worrying about the withdrawal of stimulus by the European Central Bank with plenty of money still finding its way into the system.
His own Royal London Sterling Extra Yield Bond fund has produced top quartile returns over one-, three-. five- and 10-year periods amongst its peer group, the IA Sterling Strategic Bond sector and has posted a total return of 219.19 per cent since launch, which is more than double its average peer.
He attributed the performance of the fund to two factors, noting: “One is the range of opportunity that’s open to us in the Sterling Extra Yield fund because it isn’t a fund that’s benchmarked against a high yield index.
“It’s also the ability to invest across quite a broad spectrum of assets where we see value. And I think that flexibility is really, really important.”
Performance of fund vs sector since launch
Source: FE Analytics
Royal London Sterling Extra Yield Bond currently yields around 5 per cent although Holt said the fund doesn’t have a yield target.
“It’s pretty difficult to move the dial much on the income generation because it’s an established portfolio,” he explained. “We aren’t trading it from some top down approach, so we not going to suddenly change the whole make-up of the portfolio.
“It’s an incremental approach and I think that’s really supportive of getting that balance of risk and return in what we’d say is quite an attractive space.”
The fund has an ongoing charges figure (OCF) of 0.83 per cent.