LGIM prepares Multi-Index funds for greater bond volatility
With interest rates on each side of the Atlantic expected to rise over the next 12 months, the Legal & General Investment Management Asset Allocation team has continued to diversify its bond holdings in its risk-targeted Multi-Index fund range to help manage interest rate risk and bond volatility.
Lead fund manager Justin Onuekwusi commented: “Bond yields have remained low for a sustained period. For defensive and cautious multi-asset investors in particular, who are usually large holders of gilts, this presents a dilemma. Given the likelihood that government bonds will be more volatile than in the past, it’s increasingly important to spread the risk globally and also invest across the entire fixed income spectrum. Within the Multi-Index portfolios over the past year we have been diversifying that bond allocation.
“Recently we have introduced short-dated corporate bond exposure into the range to help lower the interest rate risk of the portfolios. In addition, we have added global corporate bonds to the portfolios to broaden our exposure to credit. The financial crisis brought to the fore how important it is to diversify fixed income assets. Many countries, even those that were considered safe have had their credit quality questioned and even downgraded, including France, the UK and the US. Now, we are moving into a new environment where communication around interest rates will be key for central banks, and this is likely to cause extra volatility in fixed income assets.”
“There is a lot of talk about the impact of interest rates on bonds, but remember they impact equities too. The equity market tends to react to any hawkish communications from the Federal Reserve. With this in mind, as risk assets have performed strongly over the last few months, we have been reducing our holdings in anticipation of greater volatility as we get closer to the point of lift-off in interest rates in both the UK and the US.”
The Legal & General Multi-Index fund range was launched in August 2013, and is distinguished by its approach to active asset allocation using predominantly index building blocks. The range offers exposure to equities, bonds and property by investing in Legal & General’s popular index-tracking funds and the active Legal & General UK Property Fund.
Each of the Legal & General Multi-Index funds corresponds to a specific risk-rating and has been designed to maintain that risk rating over time. The funds’ asset allocation mix is managed on an ongoing basis by Justin Onuekwusi, Bruce White and Martin Dietz, supported by the wider Asset Allocation team of 28 people, who ensure the funds stay within the target risk profiles.
Justin said: “It is important that investors know the difference between risk-targeted and risk-rated funds. The profile of a risk-rated fund will drift over time, and this effect will be most severe at times of market stress when investors need them to remain steady. So a fund that was once rated 5 might easily be rated 4 or 6 today and the investor will no longer be holding a fund that matches their desired outcome or attitude to risk. A risk-targeted fund however should remain a 5 and therefore maintain suitability for the investor on an ongoing basis.”