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Dickie Hodges: now is the time to hedge rate rise risk

by Dylan Lobo on Mar 05, 2014 at 13:21

While he does not expect rates to rise in 2014 as low wage inflation reduces upward pressure on rates, he says there is a tactical opportunity for bond buyers right now.

'It’s cheaper to buy an umbrella when the sun is shining and it is more effective to buy protection against rising rates now than when they actually start to move and volatility picks up,' he explained.

Hodges said it is too 'simple' to talk about buying short duration instruments when managing interest rate risk, highlighting there are a range of other tools available to manage the short and long-term risks.

'[For example] I have been very active in the interest rate market so far this year compared with 2013,' Hodges said. 

'Last year I kept the duration of the fund relatively low to minimise interest rate volatility but now it’s been brought close to zero in part by using interest rate swaps.

He added: 'I currently have around 30% of the fund invested in shorter-dated assets which should mature over the next three years, by which time we expect to be able to reinvest at higher rates, and in the meantime these assets earn the fund an attractive yield.'  

In the five years to the end of January the L&G Dynamic Bond fund has returned 85.4% versus a 72.44% in its benchmark.

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