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View the article online at http://citywire.co.uk/wealth-manager/article/a653124

AA-rated Bowie warns rising inflation could devastate bond returns

by Matthew Goodburn on Jan 30, 2013 at 11:41

Bowie and Walker have been positioning the fund to deal with this eventuality, and also for the possibility of a eurozone break up or further banking crisis. 

'We have minimum exposure to financials and consumer related bonds and prefer supermarket bonds which can provide the reassurance that if they did default, the bond holders would have the right to their assets, be it machinery, property or land.'

Three of the corporate bond fund's top 10 positions are in bonds issued by Sainsbury and Tesco, which invest in the property portfolios of the supermarket chains.

'We can buy unsecured Tesco or Tesco property bonds which have a higher yield than normal corporate bonds.'

Upping risk

Co-manager Walker said some tactical risk had been added in 2012 through bonds in peripheral European telcos such as Spain's Telefonica and Telecom Italia which the pair felt had been unfairly punished due to their respective countries of origin.

They have also added lower tier two debt in Crédit Agricole bonds which they bought last June as the pair thought it had been marked down too harshly due to its exposure to Greek debt.

The fund also has around 10% in floating rate bonds where the coupon is reset every three months.

'In one of the next five years we expect double digit losses for credit so we can use these floaters to protect against that.'

The fund now has just 3% in peripheral utilities, down from 10% a year ago and profits have been taken in a raft of insurers.

Having learned the lessons of 2008 when Bowie inherited a portfolio overweight on banks which quickly became illiquid, the fund remains heavily underweight banks and has just 20% in financials as a whole, compared to the benchmark's 30%.

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