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View the article online at http://citywire.co.uk/wealth-manager/article/a640025

Thesis' Lally pushes duration out nine years on short squeeze fears

by David Campbell on Dec 12, 2012 at 00:01

Thesis' Lally pushes duration out nine years on short squeeze fears

Bond durations have been pushed out to an average of nine years across client portfolios at Thesis, with chief investment officer Michael Lally warning of a squeeze on short-duration securities.

In addition to ultimate responsibility for Thesis’s £4 billion of private capital, Lally is also manager of the Thesis Optima Bond fund , which over three years has returned 28.56% versus the IMA Sterling Corporate Bond sector average of 22.80%.

‘We think bonds are a safe place to park your cash for at least the next year, but beyond that we think the short end, particularly investment grade, looks expensive,’ says Lally.

‘We have an average duration of around nine years, versus average fund duration of four or less. I am not worried about inflation because it has been commodities, not wages-based. There is nothing that would suggest we are going to experience an inflationary spiral – it’s a China syndrome.’

Inflation factor

Too many models were producing outputs pointing to a simple reversion to mean, Lally says, without factoring in how much the mean had been shifted by excess capacity and credit market disruption.

‘The problem with precedent is that, as with case law, it is constantly being rewritten. We find ourselves now in a unique position, whereby, thanks to the global synchronisation of central banks, even fast-growing emerging economies such as China and Brazil have managed to keep their inflation rates down to single figures.

‘Meanwhile, tighter regulation of most banks has severely restricted both their ability and willingness to expand credit supply.’

Given the house’s median view of a moribund economy, he says yields of 4.5% a year over a nine-year term seem a reasonable rate of return, versus short-dated bonds priced at a loss to maturity.  

‘For a long time we were effectively facing a flat yield but it has now steepened sharply. You weren’t getting paid for duration but if you can’t see much inflation on the horizon, it now makes a lot of sense.

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