Brexit, and the UK’s subsequent interest rate cut, have spurred Henderson’s John Pattullo to increase duration in his bond funds, as the investment team settles in for record low rates in the long term.
The co-manager of the £831m Henderson Fixed Interest Monthly Income fund, alongside Jenna Barnard and Nicholas Ware, said the change in market dynamics since the UK’s June 23 referendum had been positive for the fund given the increased range of opportunities.
In a bid to increase duration, the trio have shifted up the yield curve in the investment-grade space, adding UK financials. They also retain a penchant for high yield.
The UK’s decision to leave the EU provided a boost for the portfolio, as it meant interest rates remain low – and may yet go lower still – and investor demand for bonds increasing.
“Brexit has been super for this fund, ironically because it meant interest rates would come down and will go down further,” Mr Pattullo said.
“The [news of the Bank of England's] corporate bond-buying programme caused a massive rally, and we hold 35 per cent in sterling corporates.”
Since the vote the fund’s exposure to interest rate futures has increased, along with exposure to 20- to 30-year, dollar-denominated bonds, which now make up around 25 per cent of the portfolio.
The move included adding positions in Walgreens Boots and Kraft Heinz, taking high yield exposure to 53 per cent.
“We’ve gone along the yield curve [and] we’ve kept it investment grade,” Mr Pattullo said.
“I’ve got some high yield in there too. We quite like high yield because it’s [also] quite high duration, so you get a lot of interest rate sensitivity,” Mr Pattullo said.
He added that the best place for risk-adjusted returns was both investment grade and high yield, specifically BBB- or BB-rated bonds respectively.
Financial bonds, split between investment grade and high yield, make up 34 per cent of the fund, and Mr Pattullo predicted growing demand for these assets as the Bank of England’s purchases of other companies’ debt could push investors into higher-yielding financial bonds.
This is likely to be particularly true for UK insurance names such as Aviva, Standard Life and Prudential.
The manager said: “Ironically, insurance companies and banks have performed quite well post-Brexit, not because their business models are any better but because they are the higher beta parts of the market, and the Bank of England is not buying financial bonds.
“But as they compress the industrial bond yield spread, people are getting pushed out to high-yielding financial bonds.”
However, after banking profits from the sterling investment-grade rally, the fund has slashed exposure due to a potential lack of liquidity compared with that on offer in the US market.
The trio also continue to avoid cyclicals, mining and energy.
Mr Pattullo said: “We don’t do the cyclicals. We don’t do cars, steel, shipping or airlines.
