Legal and General Investment Management bond boss Matthew Rees has been reducing his exposure to UK government bonds, even as inflation has fallen sharply.
Typically, lower inflation increases the attractiveness of fixed income assets for investors to rise, as the spending power of the income generated.
Rees said he tends to want to take “contrarian” positions in bond markets, and so bought gilts when many were selling, and now that sentiment towards the asset class has improved, he is selling as others are buying.
He said: “Many bond investors took the view that the UK would have significantly structurally higher inflation than would other developed markets, and that it would persist for longer. We don’t try to predict inflation as we think that is impossible, but that also means we didn’t think anyone else could predict it, and as we like to be contrarian, we added some gilts.”
As to the reasons he has been selling, he said: “While inflation did rise to a higher level in the UK than in many other countries, we thought it was a consensus worth leaning against and now inflation is falling in the UK at around the same trajectory as in other countries. This has prompted the market to reprice gilts relative to other government bonds, and so we have been reducing our positions.”
Rees oversees a number of strategies, including one which has a return target of 1.5 per cent above cash, and one with a return target of 3.5 per cent above cash. The cash plus 1.5 per cent strategy is run with “capital preservation” in mind.
All of the strategies he runs are operated on an absolute return basis.
Across those strategies he believes that shorter duration assets are the more attractive right now, and has been reducing his exposure to longer-duration assets.
He describes valuations for longer dated bonds as “tight” now.
The price of many longer-dated bonds rose stoutly at the start of August as a result of market concerns around the outlook for the US economy.
Within the short-dated universe, he sees ample opportunity in investment grade, high yield and emerging market bonds.
David.Thorpe@ft.com
