Defensives remain attractive as continued uncertainty over the US economy bolsters interest in gilts...
Defensives remain attractive as continued uncertainty over the US economy bolsters interest in gilts. Cautious investors are favouring defensives and gilts in a year where the overall UK market contracted for the first time in six years.
John Hatherly, fund manager at M&G, says: "Cash produced a good return and so did government bonds. Within the equity market the FTSE 350 produced a return of 8%, while the All-Share was down 5.9%. People rotated out of technology, media and telecommunications stocks and found growth in defensive assets."
Hatherly anticipates continued investor interest in defensives as caution abounds in the face of market volatility. "Investors are still pretty cautious. Interest rates are probably going to come down here soon, which is very positive for the financial markets, but investors don't know what to make of the US economy. At the very best it will slow very sharply from the growth of last year," he explains.
In the cautious managed sector fund managers are restricted by a maximum of 60% of total assets able to be held in equities. Jim Stride, investment manager at Axa Sunlife, says house policy is to keep equity holdings in the vicinity of this limit. "In general we tend to be between 50-60% in equities, preferring to be at 55% plus," he explains.
Stride says he does not shun more volatile sectors such as technology, media and telecommunications, but just invests cautiously. "The portfolio is well diversified across sectors. We do hold BT, Vodafone and Cable & Wireless. On the tech side, we hold Autonomy, Sage and Logica," he adds. "The vast majority are in the FTSE 350, but not necessarily in the FTSE 100."
In order to mitigate risk in their equity investments, Axa opts for a diversified portfolio. Explaining the rationale behind their equity investments, Stride says: "These sorts of funds appeal to the more cautious investor, possibly buying funds with equity holdings for the first time, so we don't like to give a concentrated portfolio."
Explaining the make-up of the Axa cautious managed Oeic, Stride says: "We are currently running with about 57% UK equities in the Distribution Oeic. The fund size is approximately £319m and we have about £53m in conventional gilts, £79m in index linked gilts, £7m in cash and the balance in equities."
The cash holding equates to around 2% of the fund, an amount he would be reticent to surpass. "Our policy is to remain relatively fully invested across all our funds. In practice we don't like to be above 2% in cash," Stride adds.
Stride prefers the short end of the gilt market, although not exclusively. "We have a large number of zero coupon stripped gilts, primarily all five year or lower life. Probably our single largest holding is in Treasury 5% 2004 bonds, where we hold £15m," he notes.
Axa generally eschews corporate bonds, only running two such holdings in the Oeic, totalling around £1m for the pair. "One is an index linked bond issue by one of the water companies and the other, although technically a bond, is an index linked tracking vehicle," says Stride.
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