Premier Miton Chief Investment Officer
The fight against inflation has resulted in aggressive policy tightening from central banks. This has meant that financial markets have moved in a way that investors can take less risk for the same return. By tightening financial conditions, central banks are looking to take investors out of riskier investments and into less risky areas of financial markets. For example, this could be out of high yield credit and elements of the equity market and into “safer” areas of fixed income, namely government and investment grade bonds.
With the fall in bonds, yields have hit levels not seen for a very long time. In our view they are discounting much of the inflation and interest rate risk. The short-term moves have created interesting opportunities in short-dated credit markets. In particular, the forced selling by elements of the UK pension fund industry following the mini budget has exacerbated matters.
As a result, we have increased the allocation to bonds across the range of Diversified funds. Unusually, we used another Premier Miton fund to gain the exposure, the Premier Miton Strategic Monthly Income Bond Fund, rather than investing directly into bonds. The fund has the same investment strategy and the same fund managers as we use in the Diversified funds. Using the fund allows us to gain immediate exposure to bonds, through very volatile markets, in a more diversified manner than we would have done if investing directly. The position will be reduced and invested directly into bonds, at some point, when markets are calmer.
The holding was funded from the property company weighting. Not by selling any positions, however. For each asset class we have target weights and property was below target, partly due to falling prices and partly because Kirsty Riddle, fund manager of the Premier Miton Pan European Property Share Fund, is cautious in the short term, so bonds look relatively much more attractive in our view. If you have the opportunity to do so, our latest views on property companies are outlined in the latest In Favour / Out of Favour note. It explains the short-term pain the sector is suffering and the potential it offers for long-term gain.
In the case of the Premier Miton Diversified Income Fund, given the higher yields now available from bonds, as well as using the money not being used in the property company allocation, we also reduced the weighting in cash and allocated that to bonds. This will assist with maintaining a robust dividend profile for the fund. For the Premier Miton Diversified Sustainable Growth Fund, the increased bond allocation was made directly, to ensure they met the ESG and sustainable criteria required.
Volatility in financial markets can be painful in the short term, but it also provides opportunities that we look to take advantage of; this move is one of those. However, it is also part of the longer-term opportunities that we can see and, as ever, we remain focused on the long-term risk / reward profiles of the range of funds.