The UK will lose its AAA credit rating by December, MAM Funds' Simon Callow has said, after Fitch became the second ratings agency to place the economy on negative watch.
Fitch Ratings followed in Moody’s footsteps on Wednesday, warning it may downgrade the UK in the next few years if the government does not contain the level of public debt.
Callow (pictured), running the CF Midas Balanced Growth fund alongside Mark Wright, said he doubts the ability of the coalition government to manage down the UK’s huge debt pile.
“We have concerns about the outlook for sterling as we believe the UK will lose its AAA rating by December this year. Credit agencies usually give a six- to nine-month warning before making a downgrade. Growth or inflation is the only way to deal with the 90% debt to GDP ratio, and the government has not made enough headway in reducing spending,” he said.
Since taking over lead management of the £220m fund last summer after Simon Edwards left the firm, Callow has been increasing his exposure to overseas currencies on fears over the outlook for sterling.
Some 40% of the fund is now in non-sterling currencies, including the Singapore dollar and Norwegian krone, which Callow described as a significant shift for the fund.
“In the past we were more UK focused but now we are taking a ‘bigger picture’ approach and adopting a global perspective to reduce drawdown in the fund,” he said.
He is also considering removing the ‘growth' tag from the name of the fund, having refocused it to lower volatility.
Meanwhile the manager is also fearful of the outlook for the government bond market in the face of a perfect storm of headwinds for the asset class.
“US treasuries are spooking us at the moment,” he said. “You have seen the yield on 10-year treasuries and gilts move to 2%, negative real yields in the bond market, the US economy firing on all cylinders, as well as QE – it is a recipe for a dangerous outcome for US treasuries. Yields could blow out and you could see big capital losses.”
Callow has built up a position in inflation-linked strategies to mitigate inflation pressures, holding Fidelity’s Emerging Markets Inflation Linked Bond fund, run by Andrew Weir.
He has also been reducing equity holdings in the portfolio, selling them down into the rally seen over the last few weeks and building up cash to take advantage of new opportunities.
Having reduced the less liquid small-cap holdings the fund had held historically, Callow's equity exposure is primarily in FTSE 100 and FTSE 250 stocks with a strong emerging market presence, including Diageo and Reckitt Benckiser.
In the alternative assets space, he is using ETFs to short indices including the S&P 500, and also has exposure to hedge funds and private equity strategies.
Over the three years to 3 March, the fund has returned 64.3% against an average 50.6%, ranking it in the top quartile of the Mixed Investment 40-85% Shares sector.
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