‘How I dodged the Brexit bul­let by sell­ing ster­ling’

The Daily Telegraph - Your Money - - READERS’ LETTERS -

act­ing to pro­tect the fund’s cap­i­tal. We’re do­ing that in three ways. Firstly, we’ve been buy­ing bonds that don’t be­have in a tra­di­tional way, ig­nor­ing “fixed-in­ter­est” bonds that will fall in value if in­ter­est rates rise.

In­stead we’re in­creas­ing buy­ing of “float­ing rate notes”. They have the pay­out linked to in­ter­est rates. So as rates go up, the coupon re­sets at that higher level ev­ery three months. Our big­gest hold­ing at the mo­ment is Amer­i­can float­ing rate notes.

The sec­ond thing we are do­ing is own­ing in­fla­tion-linked bonds. They will re­act more to ex­pected changes in in­fla­tion, as op­posed to in­ter­est rates.

We also use “fu­tures”, a type of de­riv­a­tive con­tract. That al­lows us to take a po­si­tion where we ex­pect in­ter­est rates to rise.

They work the op­po­site way to tra­di­tional bonds – when in­ter­est rates rise, these in­stru­ments go up in value.

CV: Jim Leav­iss

One way to look at this is what we call the “in­ter­est rate du­ra­tion” of the fund. This is a mea­sure of sen­si­tiv­ity to move­ments in rates. Cur­rently, the fund’s du­ra­tion is just over two years.

For in­stance, a 1pc rise in in­ter­est rates on a port­fo­lio with a du­ra­tion of 10 years would cause it to have a 10pc fall in value. With a two-year du­ra­tion there would only be a 2pc fall in value.

Of course, the ex­change for hav­ing this “short du­ra­tion” is lower yields.

Long-du­ra­tion as­sets typ­i­cally have higher yields. But ac­tu­ally at the mo­ment we’re not giv­ing up very much, be­cause 15-year UK gov­ern­ment bond yields, for in­stance, aren’t ac­tu­ally that much higher than two-year yields.

Hav­ing no ex­po­sure at all to the pound over the course of the Brexit vote de­liv­ered a lot of value for in­vestors and was the rea­son be­hind the strong per­for­mance we had in 2016.

The mar­ket was com­pla­cent about the risk of a “Leave” vote. I didn’t think that out­come was likely ei­ther but my job is about man­ag­ing risk.

We thought if Re­main did win the pound wouldn’t rally much. Whereas the Leave out­come would have a big im­pact. So to pro­tect our pound in­vestors in a global bond fund, hav­ing no ster­ling ex­po­sure was about re­duc­ing risk. I didn’t ex­pect it to pay off as well as it did.

Glob­ally, the rate of com­pa­nies go­ing bust has been very low since the fi­nan­cial cri­sis. Nor­mally that’s where bond man­agers make their mis­takes. For me, it has been more about not own­ing more emerg­ing mar­kets over the past two years when they’ve done tremen­dously well.

We’ve had 10pc of the port­fo­lio in emerg­ing mar­ket bonds, but we should have had more like 30pc. There was a lot of value there, yields were a lot higher than the rest of the world and they’ve per­formed very well.

Yes, there’s been po­lit­i­cal tur­moil in places like Brazil and Turkey, but gen­er­ally the en­vi­ron­ment has been quite be­nign and ac­tu­ally less po­lit­i­cally volatile than the de­vel­oped world, whether that be Bri­tain, Amer­ica or the EU. Yes, but I won’t say how much. It’s enough that I’d be very up­set if I didn’t have it.

My per­for­mance-re­lated pay is based on how well the fund does against other global bond funds over three-year cy­cles. A foot­baller, prefer­ably for Not­ting­ham For­est. “In re­cent weeks my feel­ings around the US have changed,” said M&G’s Jim Leav­iss. “Af­ter Don­ald Trump was elected there was a dra­matic sell-off of US gov­ern­ment bonds be­cause peo­ple thought he was go­ing to start spend­ing and there was go­ing to be ‘re­fla­tion’, tax and health­care re­form.

“Since then there’s been dis­ap­point­ment and we took our ex­po­sure in US dol­lar, via both gov­ern­ment and corporate bonds, down to below 50pc.

“But I think it’s gone far enough now. In the past three or four weeks we’ve in­creased our dol­lar ex­po­sure back up to 70pc and re­duced our euro and Ja­panese yen ex­po­sure. Not be­cause we’re wor­ried about those economies par­tic­u­larly, but be­cause those cur­ren­cies both ral­lied so much against the dol­lar over 2017.

“The dol­lar had de­pre­ci­ated as peo­ple lost faith in Mr Trump’s abil­ity to de­liver eco­nomic growth and man­age the var­i­ous geopo­lit­i­cal sit­u­a­tions he has found him­self faced with. “But US eco­nomic data has been sur­pris­ingly strong again and I think it’s quite clear the Fed­eral Re­serve wants to get on with it and will be hik­ing in­ter­est rates at least one more time be­fore the end of the year. “To add to our dol­lar ex­po­sure we’ve had to sell other hold­ings, such as Swedish krona. The Swedish gov­ern­ment was the third high­est is­suer in the port­fo­lio, at 2.9pc (see Top 10 hold­ings, above) be­cause yields were sig­nif­i­cantly higher than other Euro­pean coun­tries. “The money print­ing pro­gramme of the Euro­pean Cen­tral Bank meant you’ve been pay­ing to lend to the Ger­man gov­ern­ment for as long as five years.”


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