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Gilts face a tough few years, says Hargreaves' Smith
Hargreaves Lansdown's David Smith explains why investors should avoid expensive UK government bonds.
Markets
Financial turmoil in the eurozone is driving investors to buy UK gilts as a buffer from the uncertainty sweeping the continental markets.
However, the rush into the nation’s government debt, which has pushed yields down to record lows, is worrying some investors who say the asset class is a no-go for making meaningful returns.
David Smith, fund manager at Hargreaves Lansdown, is avoiding gilts in favour of corporate bonds.
He says: ‘Our view is that the next three to five years in the bond world is going to be a tough time. Five-year gilts are paying 1% and the inflation expectation is 2.4%. So people who are buying five-year gilts are volunteering to lose 1.4% each year, for the next five years.
‘We essentially have no exposure to gilts, which is a position we’re pretty happy with. We just see absolutely no value in the UK gilt market and we’re happy to take on some credit risk and move away from the gilts market.’
Smith is a Citywire A-rated fund manager at Hargreaves Lansdown where he oversees the Multi-Manager Strategic Bond and Multi-Manager Equity & Bond trusts, which invest in other funds. The bond trust has returned 45.9% over the past three years, compared with the Markit iBoxx Sterling Corporates' total return of 43.8%.
The view has been echoed by Richard Woolnough, manager of the M&G Optimal Income fund, which is one of Smith’s top holdings, as he is moving to ditch government bonds in favour of high-yield investment grade bonds such as Virgin Media (VMED.L) and Lloyds (LLOY.L).
In shifting the fund’s focus to investment grade corporate bonds Smith has been increasing his holdings in funds that can invest in more adventurous bonds such as Woolnough's fund along with the Royal London Sterling Extra Yield , the Inv esco Perpetual Tactical Bond and the Artemis Strategic Bond funds.
Analyse the fund managers
Smith previously worked at Citywire, where he was involved in setting up the manager ratings system and says he still focuses on an individual’s performance when he’s selecting funds for the portfolio.
He explains: ‘The the way we do things here is very similar to the way that Citywire thinks, in that the managers are very important and we think that judicious analysis of managers’ track records rather than funds can tell you a lot about the fund.’
‘What we’re trying to do is pick out the managers that we believe have demonstrated an ability to add value over the long term once you strip out factors that might skew things along the way.’
The fund’s top holdings are in the Fidelity MoneyBuilder Income fund, run by Citywire A-rated manager Ian Spreadbury.
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- HL Multi-Manager Strategic Bond Trust Acc
- HL Multi-Manager Equity & Bond Trust Acc
- Royal London Sterling Extra Yield Bond A
- Invesco Perpetual Tactical Bond Acc
- Artemis Strategic Bond QI Acc
- Fidelity Moneybuilder Income
- M&G Optimal Income A Inc
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- M&G's Richard Woolnough: why I'm ditching government bonds
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