Fund of funds managers are maintaining high levels of fixed interest exposure in anticipation of fur...
Fund of funds managers are maintaining high levels of fixed interest exposure in anticipation of further weakness in global equity markets.
Funds in the cautious managed sector are less than 50% invested in equities on average, with some 46.2% in bonds and 4.5% cash as of 1 August, according to Lipper.
The IMA sector requirements say funds should be at least 40% invested in fixed interest and a maximum 60% in equities, although managers are on average 5.2% overweight bonds.
The average equity exposure of 49.4% is predominantly focused on the UK, with funds, typically holding 45.1% in domestic equities and just 4.3% in overseas stocks.
Fixed interest exposure is also domestically focused, with funds holding 35% in UK bonds and 10.2% in overseas issuance on average.
By comparison, funds in the active managed sector are on average holding 3.9% in fixed interest, with 4.7% in cash and the balance in mainly UK equities, according to Lipper.
Gary Potter, one of the team managing the cautious managed Credit Suisse Multi-manager Balanced Strategic fund, recently upped the fund's fixed interest exposure on the back of concern over the direction of global equity markets.
Potter says: 'We are targeting 45% in fixed income, up from just over 40% on 1 August. Many commentators expect further interest rate cuts, which has boosted UK, European and US bonds as people reassess the relative attractions of equities and fixed income.'
John Chatfeild-Roberts, manager of Jupiter Merlin Income Portfolio, has 49.4% of the fund in fixed interest to meet its stated income requirements but is zero weighted in the asset class in Jupiter Merlin Growth, which he also manages.
Chatfeild-Roberts says: 'We have no bonds and zero cash in Jupiter Merlin Growth because it is run as an equity fund. At the beginning of June, we should have bought bonds but we did not see what would happen in equities. There is still nothing to stop us doing that but, there is not much value to be added.'
Potter stresses fixed interest weightings in the sector have risen as much by accident as by design. Fund manager weightings in bond funds have automatically risen as equity valuations have been compressed.
Potter notes: 'Taking our fund as a proxy for the sector, we have had difficult equity markets and the bounce we saw is being unwound again. However, if you do nothing, your fixed income weighting will go up, even if bonds stay flat.
'We responded to the rise in the markets in July and early August by increasing our weightings in fixed income. This was partly because of equity markets giving back a bit and partly because of a desire to become more defensive. The weighting is unlikely to go above 50%, though, because of the fund's long-term absolute return aims.'
In Jupiter's Worldwide Portfolio, Chatfeild-Roberts has halved the US equity exposure over the course of the year, from 50% in January to 25% in August. Much of this money has been put to work in Japan and Europe. He also upped his Japanese equity exposure from 3% to 13.5%, while 21.5% of the globally invested portfolio has now been poured into European equity collectives.
Fixed interest outperforming.
Europe and Japan to outperform US.
Further interest rate cuts possible.
Equity markets remain weak.
Fears over corporate profitability.
Little further upside for bonds.
‘Most significant’ upgrade since launch
Changes happening over coming months
Had accepted British Steel business
Aimed at HNW clients and family groups
Set for 1 April 2019