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Duration dynamics: how three top managers are positioned

As inflation creeps up and interest rates rise, Citywire-rated fixed income managers reveal how they are playing duration.

Duration divulged

The US Federal Reserve raised interest rates in March 2016 and have indicated that they will continue to gradually raise them. As inflation rises in Europe, the ECB may follow suit.

Fund managers have not been slow to response. Starting in mid-2016, a number of managers, namely Richard Woolnough and Ariel Bezalel, have opted to cut duration in their funds. However, more recently, Bezalel increased duration in his main fund due to changing conditions in the US.

With this in mind, Citywire Selector asked top-rated fixed income managers to divulge their current duration levels and how they are planning on switching or sticking during the rising rate environment.

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Iain Stealey, JPM AM

Fund: JPM Global Strategic Bond

Duration: CUT to 0.4 years

Citywire + rated Iain Stealey has cut duration in the JPM Global Strategic Bond fund from two years to 0.4 years, which is a record low for the fund. He has sold out of agency mortgages as he believes they have a high correlation to interest rates and would be negatively impacted if the US Federal Reserve stopped its asset purchasing programme.

‘If a rate hike doesn't happen in December, they will talk about unwinding the balance sheet. They own a combination of treasuries and mortgages and what they will be doing is reducing the re-investment next year,’ Stealey said.

‘If you take something like the US 10-year, the yield is about 2%. Our expectation is that this moves towards 3.5% by the end of the year. If we do get to those levels that would be a time where we would be looking to take that duration back up again. It would still be less than you would have on a traditional bond fund, but we are at record low levels.’

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Arif Husain

Fund: T Rowe Global Unconstrained Bond

Duration: HOLD - 4.66 years

The head of international fixed income at T Rowe Price holds long duration positions and 72.6% of the fund is allocated to government debt. Citywire A-rated Arif Husain said an economic recovery was built into the market but had failed to impress him. He said the market could be expecting too much from Donald Trump’s plans for the US economy.

‘Any failure to deliver on tax cuts and other pre-election policies will dent confidence and possibly cap real economic growth. Unless we see a comprehensive reform agenda, there is a risk pessimism takes over, causing interest rates in core markets to decline. This is why long-dated bonds in the US appear attractive right now,’ Husain said.

‘Interestingly, the lack of growth momentum may not impact European bonds to the same extent as other countries and regions, as the divergence between soft and hard data is not as large. While growth disappointment would certainly lead to an underperformance of periphery sovereign bonds and corporate bonds in the short term, that underperformance is also more likely to be contained as it may force the hand of the ECB to lengthen its bond buying programme.’

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David Zahn, Franklin Templeton

Fund: Franklin European Total Return

Duration: UP - 6.5 years

Citywire + rated David Zahn last increased his duration in November 2016. The head of European fixed income at Franklin Templeton actively manages duration in his fund and it fluctuated last year in response to the market.

‘In 2016, we started the year with a duration of seven years as we were constructive on the European bond market. However, once German bund yields went negative in the late summer, we hedged the portfolio duration using futures to bring the duration down to 3.5 years as we felt bunds upside was limited.

‘After the bond sell off in November, we increased duration to 6.5 years, as we believed the continued ECB accommodative stance would be supportive of the bond market. I think it is important to look at duration composition rather than just the top line duration exposure.’

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Related Fund Managers

Ariel Bezalel
Ariel Bezalel
21/50 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 13.29%
Iain Stealey
Iain Stealey
83/407 in Bonds - Global (Performance over 3 years) Average Total Return: 6.36%
Arif Husain
Arif Husain
92/407 in Bonds - Global (Performance over 3 years) Average Total Return: 5.74%
David Zahn
David Zahn
338/407 in Bonds - Global (Performance over 3 years) Average Total Return: -2.44%
Richard Woolnough
Richard Woolnough
45/68 in Bonds - Sterling Corporate Bond (Performance over 3 years) Average Total Return: 13.93%
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