Thurleigh dismisses bond bubble fears

Thurleigh investment manager Luca Serino believes fears of a bond bubble are overdone.

The firm’s investment team believes credit still looks attractive and it is currently allocating around 30% of an average medium risk private client portfolio towards fixed income.

‘I do not believe that we are in a bond bubble. I think a lot of money is moving from cash to bonds because of yields, but I do not see it as a bubble because the bond markets are much bigger than equity markets,’ Serino said.

He is particularly keen to point to the healthy performance of the Pimco Total Return fund, the largest mutual fund in the world.

Yet flexibility has become key for the Thurleigh team, which explains the decision to shift exposure from high yield and investment grade bond funds to strategic and unconstrained mandates. Over the past 12 months the team has reduced exposure to Pimco’s high yield and investment grade credit funds in favour of the M&G Strategic Corporate Bond and Pimco Unconstrained Bond fund.

The team currently has no exposure to conventional gilts, due to concerns over the UK’s deficit and low yields, and it also sold out of convertibles over the course of the year. Around 4% of a medium risk portfolio is in the local currency emerging market debt fund Pimco Developing Local Markets. Serino says this helps to diversify the overall currency exposure in private client portfolios.

‘Overall we are pretty negative about sterling and the dollar against emerging market currencies,’ he said.

His pessimism on the dollar partly underpins the team’s decision to sell out of its exposure to the US market through the iShares S&P 500 exchange traded fund (ETF) and transfer the allocation to the iShares MSCI World ETF, which tracks the top 1,500 companies in the world.

The team is seeking exposure to emerging markets through an ETF and the Ucits MW GaveKal Asian Opportunities fund, a flexible multi-asset portfolio in which Marshall Wace bases asset allocation decisions on GaveKal’s top-down views.

Serino is also targeting China through a 3% position in the iShares FTSE Xinhua China 25 ETF.