JP Morgan Asset Management’s Iain Stealey has increased duration to a record high of over five years to reflect his belief government bond yields will remain low for the foreseeable future.
Stealey said the duration of the fund had been increased from 4.74 years to 5.01 years at the end of February. He currently has 9.3% of the fund allocated to government bonds.
‘The incredibly strong start to the year for core government bonds is unsustainable. Year-to-date global government bonds have had their best performance since 1993, but it would be unrealistic to annualise this performance, so investors should expect consolidation.'
'In that context, it makes sense to seek total returns in credit and as unconstrained investors we continue to like both high yield and investment grade,' added Stealey.
‘We’ve taken duration to a record high of five years in our portfolio, a reflection of our conviction that global yields will stay low. That’s because the risk-free rate in some countries has dipped below zero, dragging down global yields. Put another way, of the $44 trillion in assets in the global aggregate bond index, 20% of that is trading on negative yields.'
Stealey thinks US interest rates would stay at around 1%, while the market has priced in an expectation of the Federal Reserve only raising interest rates once in 2016.
Elsewhere, US corporate high yield is the largest sector in the fund at 26.6%, which is a rise from 18% in September 2014. Stealey is avoiding riskier areas of the market like energy and mining.
‘The high yield rebound since mid-February has seen the market return to basically flat year-to-date and US high yield is currently on a spread of 728 basis points over government bonds – indicating investors can get a 8.5% average yield.’
‘Our allocation to US HY is yielding more like 7.5% because we’re avoiding beaten-down energy and mining names and staying with higher quality companies. That said, we think default risk has been fully priced into the market and that investors are being well compensated for holding US HY on a risk-adjusted basis,’ he said.
Stealey has 18.2% allocated to non-US high yield which is mostly euro high yield and some allocation to the UK. He thinks it may offer more opportunities than its US counterpart.
‘European HY is even more attractive than US high yield on a fundamental basis and is yielding 5.6%, which is all spread if you consider that the risk free rate in Europe is effectively negative. European HY has outperformed its US counterpart market for the last four years, it remains earlier in the credit cycle and it will continued to be supported by an accommodative central bank.’
Over the three years since the fund was launched, it has returned 7% in US dollar terms. Its Citywire-assigned benchmark, the Barclays Multiverse TR USD Unhedged, fell 0.4% over the same 36 months to the end of February 2016.