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Fund managers choose career safety – loading risk onto investors
Popularity of bonds that offer below-inflation returns is a symptom of career risk aversion, JOHCM UK Opportunities manager John Wood says.
Risk-averse fund managers who are seeking the safety of low-yielding government bonds are saving themselves ‘career risk’ – but instead loading ‘absolute valuation risk’ onto investors, says JOHCM UK Opportunities fund manager John Wood.
'The old investment trust adage "no one ever got fired for buying IBM" seems to have morphed into "no one ever got fired for buying government bonds" – US, UK and German bonds at least,' he said. 'This avoidance of career risk means end investors are being exposed to a far more important risk: absolute valuation risk.’
Rising exposure to the perceived safe havens of government bonds means investors face potentially negative returns over the longer term.
'Why anyone would want to lend money to the grossly indebted UK government for 10 years at 1.6% when annual consumer price inflation is running at 2.8% is beyond us. We think focusing on absolute value is conducive to better real returns over the long term, ' said the investor, whose fund features in Citywire Selection.
Future bright for quality blue chips
Wood is 'tremendously excited ' by the long-term prospects of quality blue chip stocks despite the poor current economic environment.
He is sitting tight on his 33-stock portfolio, believing that patience will ultimately be rewarded and his holdings will be the long-term winners.
The fund has almost reached the £1 billion mark, which Wood believes is maximum capacity for his strategy of buying and holding quality blue chips displaying high returns on capital. The group has confirmed that it will look to take steps to limit inflows into the fund once it hits this mark.
'Despite, or indeed because of, the crushing pessimism surrounding equities as an asset class, we are tremendously excited by the long-term prospects for blue chip stocks investing. Our focus continues to be on identifying companies that can generate above average returns over the long term through compounding growth,' he said.
Reducing industrials, adding to healthcare
Over the first six months of the year, Wood has reduced his industrials weighting by around 6% to 21.4%, while the more defensive and generally steadier utilities sector has been doubled to 5% of the near £1 billion portfolio.
Wood focuses on the stocks he believes are 'best of breed' in their sectors, and many have been in the portfolio for years. The low turnover has helped the fund to achieve the lowest levels of volatility of any in its sector.
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