Interest rate risk
As Dirkx sees alternative Ucits funds as providers of diversification in falling markets, something which long-only multi-asset investors mainly use bonds for, he has a strong underweight in fixed income. “We have a minimum exposure of 20%, and have been allocating between 21-24% to bonds this year. The largest chunk of this is in ETFs. “That way we are quite flexible in allocating where we want to,” he says. Within bonds, Dirkx has a preference for short duration USD corporates. “The yields are relatively attractive there, and the dollar exposure could provide some further upside.
However, as testified by the strong overall underweight to bonds, Dirkx’ overall outlook is rather negative. “It’s not really worth taking duration risk, especially if the Fed is going to raise interest rates in September, which could add further to volatility.” On top of the ETFs, BHF TRUST’s multi- asset portfolios include some floating rate notes. “We own those because they reduce the interest rate risk on the portfolio level don’t yield much less than EUR corporates in relative terms.”
Dirkx and his colleague Soumelidis currently have only one active bond fund in their focus portfolio, the Jupiter Dynamic Bond Fund, a big chunk of the portfolio with a weighting of 4%. “In general we prefer to do the asset allocation ourselves, but we make an exception here. Though we are also aware we are exposed to star manager risk by investing in this fund, we are confident with the returns and the communication of the manager and portfolio changes are transparent.
