PARTNER INSIGHT: Look at your maturity spectrum and credit risk, writes Richard Nelson, Senior Fund Manager at RLAM.
Within a bond fund you can broadly improve yield in two ways: firstly, by increasing the maturity spectrum (interest rate risk), and secondly you can add credit risk by buying corporate bonds. For us, at the moment, we prefer to take more credit risk which allows us to keep the maturity profile of the fund shorter-dated. However, if you're going to take that credit risk, you need to adopt some methodologies to mitigate the risk. Diversification is one of them.
Trade tariff wars
We think it's a bit early to know whether this is going to have a meaningful impact on UK or global growth. I think it's perhaps an element of posturing by President Trump ahead of the mid-term elections in November and this posture will enable him to perhaps win a few deals ahead of those elections so he doesn't lose the majority of the House of Representatives. But if it turns into something more than that, then obviously that may have an impact in terms of growth and we will review the portfolio at that time.
The difficulty with these geopolitical situations is there's quite a lot of them. Fundamentally, we look at the performance of the economy which does remain quite decent. We have low interest rates and that underpins our strategy of investing in credit. But we're not being blasé about it; we monitor the political situation on a daily basis.
Political risk
The other thing we have to think about is how the central bank and the Monetary Policy Committee (MPC) will react to these outcomes. Because after the Brexit vote itself, the MPC certainly reacted; they cut interest rates and supported the corporate bond market. So you have to be aware of that as well, not just what's developing in the political landscape.
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