Tactical shifts pay off in Q3 for UK fixed interest fund managers

Astute tactics proved a winning strategy for UK fixed interest fund managers in the three months to the end of September, says the latest update from Standard & Poor’s Fund Services, available at funds-sp.com.

One of the top performers in the S&P UK gilt sector was the A-rated Standard Life Investment Funds – UK Gilt Fund. S&P fund analyst Alison Cratchley explained fund manager Philip Laing’s tactical approach: “He traded duration to good effect, generally between neutral and short but sometimes long, with a tendency to sell into strong rallies. Yield curve positioning also boosted returns.”

Cratchley noted that although Laing had wrongly remained negative on index-linked bonds, believing the price of inflation protection to be too high, his tactical moves had still succeeded in adding value in that area.

Another top quartile performer was the A-rated Fidelity Investment Funds – Sterling Bond Fund. Fund manager Ian Spreadbury gained from an overweight position in gilts and high-yield bonds, which outperformed corporates. The fund’s exposure to asset-backed securities boosted returns as the best performing fixed-income asset class in a time of heightened leveraged buy-out risk. Underweight positions in consumer and industrial sectors also added value.

Investors made reasonable returns in the third quarter, with the median UK gilt fund returning 3.3% and the median UK fixed-interest fund 2.8%. However, year-to-date returns were dismal: 0.9% from the median UK gilt fund and just 0.7% from the median UK fixed-interest fund.

Looking ahead, Standard & Poor’s found UK fixed-interest fund managers unanimously cautious. Gordon Brown at Baillie Gifford, Malcolm White at Legal & General and Jim Leaviss at M&G all see worrying signs of inflationary pressures and expect UK interest rates to go above 5%.

“Managers are particularly cautious on the outlook for corporate bonds,” said S&P’s Cratchley, citing defensive moves by two managers. Paul Mingay, who runs the AA-rated Norwich Union Investment Funds – Corporate Bond Fund is continuing to favour higher quality bonds at the expense of lower quality debt, where pricing is much more sensitive to changes in market direction. Meanwhile, Alasdair MacLean, who manages the A-rated Standard Life Investment Funds – Ethical Corporate Bond Fund, has introduced exposure to AAA-rated issues as a defensive measure.