How these 7 wealth managers are positioned for UK rate rises
Evangelos Assimakos: investment manager, Rathbones, Edinburgh
As we believe rate expectations are rising as part of growth recovering towards normal levels and in the absence of inflationary pressures, we are positioning our portfolios with a bias towards short duration corporate and government bonds, towards cyclical areas of equity markets and away from counter-cyclical, defensive sectors which have provided our clients with a perfect combination of yield and capital growth but look more vulnerable as a whole now.
High yield debt will likely rally a little longer but it pays to exit this party before the music stops as liquidity will likely be poor on the way out for the late revelers. Floating rate debt also looks interesting as a theme but it is a challenge finding attractively-priced ways to get exposure. Lastly, rising rates are hurting emerging market valuations and we are keenly monitoring both debt and equity markets for potential dislocations and attractive entry points.
Jim Wood-Smith: head of research, Hawksmoor Investment Management, Exeter
Although we don’t believe that a rise in interest rates is imminent, it is clear that the markets have a strong consensus that bank rate will rise in early/mid 2015 and Fed Funds possibly even earlier. This will preoccupy a lot of their thinking over the remainder of the year and we are expecting equity and bond markets to be more volatile than for a while.
To defend against this we have been running low bond weightings for a while, but maintaining a focus on strategic bond funds, index-linked, a little in high yield and more recently convertible bonds. We have also tried to keep duration as short as possible.
For the very adventurous, if we are right in thinking rate rises will be later rather than sooner, we are starting to look to see if there will be opportunities to increase duration. Developed market equity will keep providing attractive returns and is our asset class of choice, but we are very selective with our timing of buying and selling and are not relying on the markets to do any heavy lifting for us.
Gavin Haynes: managing director, Whitechurch Securities, Bristol
At the current stage of the cycle, the risk of future interest rate rises is a key factor when deciding the asset mix of client portfolios. An interest rate shock would be bad news for all major asset classes including stock market investments.
However, our current view is that although interest rates are likely to tick up over the next 12 months, with a lack of inflationary pressure and economic growth fragile we expect any increases to be gradual.
The key area that we have acted upon interest rate concerns is within our fixed interest exposure. Interest rates rises are specifically bad news for many areas of the bond market and we have been reducing fixed interest exposure over the past year, in favour of absolute return and commercial property funds for our non equity exposure.
Where we have retained fixed interest this has been skewed towards short dated bonds that and high yield Corporate bonds that are less interest rate sensitive. We are also looking at index linked bond funds and floating rate notes.
Emma Black: investment manager, Tier One Capital, Newcastle
The prospect of rising interest rates still threatens ongoing economic recovery and thus, like the majority of the market, we don’t expect significant movements in the very short-term. It is inevitable however that as the markets normalise, rates will drift higher, a process normally driven by positive economic data.
A rise in interest rates will predominantly have an impact in the fixed income sector and as a result we have been allocating into synthetic zero structured products with particularly defensive barriers. Such holdings target a stable and consistent 4.5% annualised compound return in a way which should be impacted less than a corporate bond by a base rate rise.
Elsewhere in a diversified portfolio, exposure to high-yield large cap equities combined with short-duration bond funds can also help to cushion returns as interest rates creep upward.
Andrew Wilson: head of investment, Towry, Bracknell
We had already positioned our portfolios for a rise in interest rates, as the scale and dangers of potentially rising bond yields far outweighed the marginal gains still left on the table if yields inched lower.
To that end, we have our lowest ever fixed interest exposure in the portfolios, and with significantly sub index interest rate sensitivity. Additionally, part of our clients’ bond exposure is in an allocation to relative value fixed interest strategies, where there is no static 'beta capture'.
Monies usually allocated to long only fixed interest asset classes, have, to quite a large degree, been deployed into Non-traditional strategies within our client portfolios. These can still provide some of the diversification and relative stability that more fairly valued bonds used to provide, but which will prove harder to come by as and when rates rise.
Daniel Good: investment management director, Brooks MacDonald, Leamington Spa
With rising interest rates a question of ‘when’ rather than ‘if’, we have for some time been reducing the interest rate sensitivity of our fixed income investments via the use of higher yield, shorter duration strategies or via strategic bond funds employing their maximum allowable exposure to high yield and floating rate instruments. Investing in high yield inevitably increases the risk profile of your fixed income exposure, but we anticipate default rates to remain low as the macro picture improves and feel it an acceptable risk to take in a well diversified portfolio.
We would not advocate a wholesale move out of bonds as they still provide a valuable diversification benefit relative to other assets as well as providing regular, defined coupons for those clients to whom income is of utmost importance.
The selective use of structured products also enables us to place less emphasis on fixed interest to generate income for our clients and as rising rates are often the result of an improving macro picture, one should not discount growth in equities as a counter to downward pressure on bond prices.
Nathan Sweeney: investment manager, Architas, London
Unless we see a material deceleration in the current trajectory of data in the UK and US, it’s pretty obvious that interest rates are going to begin to rise at a steady pace in the first half of next year. Janet Yellen & Mark Carney’s guidance have both been quite explicit, although Mark’s track record on forward guidance is questionable.
In addition to the obvious equity, short duration high yield credit, and floating rates note trades there are a number of other areas we can invest in to provide protection against rising rates, due to the nature of our multi asset portfolios. For example, property is another asset class that will bode well in an inflationary environment. We have a holding in a grounds rents fund that has 60% of the portfolio invested in ground rents that are linked to RPI.
Alternative assets also provide plenty of options, one such, being the John Lang Infrastructure Investment Trust, which has a consistent yield, predictable return, and provides inflation linked income.