Aviva Investors' Chris Higham has slashed risk exposure in his £1.6bn Corporate Bond and £96m Strategic Bond funds, shifting 25% of the portfolio into cash on fears of a bubble forming in risk assets.
The manager has upped his cash levels in the Strategic Bond fund over the past six months from zero to roughly 10% in cash and 15% in cash equivalents, including index-linked government bonds. He has also taken risk off the table in Corporate Bond fund by increasing exposure to AAA-rated companies by 10%.
“We have taken a fair amount of risk off in recent months. There are so many headwinds it does not pay to have too much risk on right now,” said Higham.
“Our subdued outlook for developed markets, an influx of liquidity increasing the risk of market bubbles, and contagion risk associated with the European sovereign debt crisis are the core headwinds at the moment.”
Higham would need to see positive manufacturing data alongside a heavy sell-off before reintroducing risk into the portfolios, he said.
In the high-yield space, the manager said 2011 has been a record year for supply, with companies taking advantage of very low interest rates to refinance existing bank debt in a number of high profile deals. However, he warned too much activity in the high-yield market in a short space of time could lead to a period of “short-term indigestion”.
“Two-thirds of the appetite for high yield is coming from banks looking to reduce their balance sheets. This has been an ongoing trend since the onset of the crisis and will continue while rates remain low,” the manager said.
On the issue of European sovereign debt, Higham forecast a tough decade for Western European sovereigns.
“The European Central Bank is clearly keen to kick the can down the road for a bit longer, because taking these losses is likely to be too painful for it and the banking sector. To get country balance sheets back to where they were before the crisis will take up to 20 years,” he added.
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