Writing in mid-March, we said that recent moves in risk assets, including credit markets, had ‘priced in’ some serious pain, that markets are callous, and it was time to ‘move on’.
The volatility has subsided in equity markets, which have generally made modest gains since then, and credit spreads have eased back in tandem. But sovereign bond yields have made a further significant move higher as the US ten-year flirts with 3% and the UK with 2%. The US Federal Reserve continues to talk tough about rate increases to come over the course of the year, with two-year Treasuries now yielding 2.6% but the Fed Funds (base) rate still at 0.5% it is clearly time to get on with it…
UK rates are not quite as extreme, two-year Gilts yield 1.6% against the Bank’s base rate of 0.75%, but the message from the market is the same. We do expect the Bank to continue to raise rates over the course of the year in a ‘better late than never’ attempt to curtail inflation. But we do wonder how far they will feel able to raise the Base Rate against a backdrop of rising food and energy bills and the increase in National Insurance contributions, which are bound to have a dampening effect on the economy.
Within the Fund we are continuing to edge-up exposure to credit, though we are not increasing the overall duration, which remains at 2.2. The returns from our FRN book are steadily improving with the increase in rates and the overall yield on the fixed interest book is now nudging 4%, so we are feeling much more comfortable with prospects for the rest of the year. We would stress that we have also not increased the duration within the Fixed Interest slice of the portfolio (looked at in isolation), this remains at 4.3 overall. the asset mix for the year to date is show in the chart, see right.
Changes to the portfolio have not been major. We have been actively managing the credit exposure with some further reduction in short-dated FRNs and some credits and the addition of some notable new holdings including: Haleon 2.875% 2028 (Haleon is the GlaxoSmithkline spin-off due shortly), NatWest 3.619% 2029 and Blackstone 4.875% 2026. Convertible exposure is lower as we sold our remaining Glencore US dollar holding.
Infrastructure has continued strong despite the increase in long-term rates, we have continued to reduce some of the ‘traditional’ plays such as HICL Infrastructure and International Public Partnerships but supported a capital raise from SDCL Energy Efficiency, our preferred play in the efficiency area. The battery storage holdings continue to produce good figures and gains for the portfolio.
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Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.