View the article online at http://citywire.co.uk/money/article/a577518
Mike Amey: loss of AAA rating wouldn't hit UK gilts
Mike Amey, manager of the Allianz Pimco Gilt Yield fund, says that losing our prized AAA rating wouldn't be that big a deal for the asset class, citing the US as an example.
Amey points out that the US has been relatively unaffected despite its downgrade from AAA to AA credit status by ratings agency S&P.
'The risk of a UK downgrade from Moody's and Fitch is there, but we don't think it would make any difference if gilts were AA or AAA rated, although it would be a big deal politically. S&P's US downgrade has not created huge problems,' he said.Amey's fund posted a gain of almost 16% last year as gilts saw strong returns, but Amey said he is targeting a more modest return of between 2% and 4% for 2012.
Currently he believes there is better value in index-linked gilts than government bonds, so he has gone overweight in that sector, especially on index-linked gilts (or linkers) with 10- to 20-year durations.
At the end of February the £950 million fund held 5% in 20-year inflation-linked gilts with the bulk of the portfolio – around 60% – in gilts of between five and 15 years in duration.
The balance of 10% is in cash, although Amey said he had started to reduce this after taking advantage of rising yields after fallbacks in the gilt markets in the past week. Amey said that some 20% of his gilt holdings are in long-dated bonds.
Signficant fall in inflation dismissed
'We are sceptical that inflation will fall as fast as many people think,' Amey said. 'Linkers trade off the Retail Price Index (RPI), and at the moment our expectations are that RPI will settle at around 3%. Markets expect it to go to 2.5% or 2.75% but we think that is too optimistic.'
Despite RPI inflation falling to 3.7% from 3.9% on 20 March, Amey is happy to stick with his view that mid-term inflation will remain stubbornly at around the 3% mark.
'For a long time there has been very low goods-price inflation due to Asia, but with inflation more of an issue in Asia goods price inflation is going up and inflation will remain sticky on a three- to five-year view,' he said.
'From the longer-term perspective, the relationship between growth and inflation, and the willingness for central banks to tolerate a higher inflation rate because of economically challenging times, means that 3% on a 10-year gilt looks worse value to us than linkers.'
Amey does not expect the Bank of England to raise rates before 2014 at the earliest, which means intermediate duration government bonds might offer some value, albeit only against cash.
'A five-year bond at 1.2% does not sound great in absolute terms, but it is okay relative to cash. We prefer five- to 10-year government bonds, and think linkers are a safer bet than gilts,' he said.
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