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How 5 wealth managers are positioning for a rate rise

Following Mark Carney's hawkish comments earlier, how are managers positioning their portfolios  for rising interest rates?

Carney sounds a hawkish tone.

In his first Mansion House speech last night, Bank of England governor Mark Carney left the door open for interest rates to rise sooner than expected. It was his most hawkish speech since taking on the role and spooked markets with the FTSE 100 sinking by more than 1%. Sterling gained 0.7% against both the US dollar and euro overnight after his statement, so how are wealth managers positioning their portfolios for the prospect of interest rates rising sooner than expected?

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Gary Reynolds, director and chief investment officer at Courtiers

I wouldn't panic and start thinking now is the time to sell all your bonds. Now is not the time to start moving your portfolios too far on the lower end. This is the last thing you want to do at the moment.

A part from the fact that they will have an effect on equity prices, interest rates won't be an issue because the market is now dealing with the fact you are going to get rates increases earlier than next April.

We did it too early and took a bit of a bash. However, things feel better now.

We started running fairly low duration in our funds last year. Our cautious fund, which has a 60% equity weighting and generally has quite a lot in bonds, has a risk benchmark duration of 3.18. We have been running it at 1.35.

We hold FTSE 100 positions in options and synthetic futures. The options roll next Friday, so we're now looking at rolling them earlier and make sure we're not reducing our exposure below what it is. Ww're just going to go about this as normal.

Personally, I don't think Carney will do it, and that all this is just talk. They are just trying to take the steam out of the housing market.

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Gary Stockdale, head of research at Vertem Asset Management

Carney’s announcement will help us because we anticipated that rates would rise at a quicker pace and we had been suffering a bit up to that point.

The issue with Carney is that although he is quite likeable and charismatic, his reading of the economy has been quite poor. He underestimated how big of an impact the housing market had on the economy and what the coalition government was doing to stimulate that. He misread how much momentum that had built.

So, at the end of the first quarter, we moved our portfolios around. That was arguably a little too early, but I am now quite pleased with our positioning.

Our portfolios are quite light on quality government bonds and quality investment grade corporate bonds, and a little short on duration. Instead, the portfolio was moved into asset-backed securities, floating rate notes and senior loans that are typically more immune to interest rate and Libor movements.

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Michael Lally, director at Thesis Asset Management

I took his comments with a pinch of salt and think he's just testing the water. We saw exactly the same thing happen last year in the US. I still think that secretly, he doesn't think we will have to put them up - or if he does, it will be so small that it won't make any difference.

However, most people who remember the last bear market in bonds will know that we're looking at potentially 15% or 20% falls. I'm not saying that it will happen this time, as I think it'll be a much slower painful death, but the high yield sector could take two or three big dips.

The secret is that you either play the momentum game, or you try and get out ahead of the game and get into other things.

I still think the high yield sector looks very vulnerable, despite the fact people are talking it up. We were late coming out of sovereign bonds and we were quite pleased about that because we didn't start panicking two years ago when everyone else did.

We see plenty of good value in investment grade corporate bonds, which are dull and boring, unless you think rates are going to shoot up up to 5% or 6%.

It's not just about shorting duration, it's also looking at floating rate investments, which is a fairly illiquid market at the moment. The problem is that you have to drop massively in terms of yield and wait a year or two before that gap catches up. Because most of them are linked to 3 or 6 months Libor or Libid, realistically, you're not getting much more than a flat yield of 1.5% or 2%.

The asset-backed market looks really interesting, and we have already made quite a big move into it. We're very big holders of the TwentyFour Monument Bond fund, for example. There is a lot of really pretty low risk stuff in those markets, and it is not sensitive to interest rates.

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David Thomson, chief investment officer at VWM Wealth

Mr Carney took markets by surprise in his Mansion House speech as previous guidance had been along the lines of lower for longer.

Rather than use the blunt instrument of interest rates to tackle perceived bubbles in the London property market, the Bank of England is looking at more targeted, albeit possibly ineffective measures.

There has been a downward kneejerk reaction by the market today.

However, our view is that the interest rate rise should be seen as a positive sign that economic conditions are improving and that some normalisation of rates was always going to happen sooner or later. It is not until the Bank of England starts to apply the brakes with much higher rates that investors should start to worry.

For now we are making no changes – we remain fairly fully invested and focused on those areas of the markets benefiting from economic recovery, such as smaller and medium-sized companies, and property over gilts.

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Eric Verleyen, chief investment officer at Société Générale Private Banking Hambros

With the sustainable recovery in the UK, the excess capacity is being reduced. We anticipate growth to reach 3% in 2014 and 2.5% in 2015.

Our economists are looking for a first rate hike by the BoE in the first quarter of 2015. Should it materialise earlier, it would not make a big difference as the direction is clear.

Our strategy has been to maintain very low exposure to long duration assets.

Although, gilts have performed very well since the beginning of the year, we do not want to increase our exposure as we anticipate long-dated bonds will underperform significantly in the coming quarters and years.

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