Welcome to the first Astute Fund Overview, where we’ll shine the light on how some of the recent economic news impacts the VT Astute funds.

If I had a pound for every time we’ve discussed our thoughts on inflation and interest rates in our overviews and commentaries, I’d be set to retire! Our conviction that inflation has likely peaked, and that the peak of interest rates will follow, has shaped our area of focus and research recently. So it’s logical to start the first of our Astute Fund Overviews by looking at recent and upcoming trade activity for the funds, that have been influenced by these factors.

Since the financial crisis of 08/09, whilst bonds have had their vital place supporting the diversification of a portfolio (almost like the ballast in a ship), there has been good reason to underweight exposure to bonds when seeking capital return. We go into more detail on this point in the latest quarterly commentary, which will be published at the same time as this overview.

Skipping forward to 2023 (leaving 2022 behind us) and looking at the bond market, we feel that we’re now in a position whereby issues in the bond market are largely resolved and that prices have stabilised. This underlines our conviction towards bonds – we want to capture the high yields on offer by increasing our bond exposure.

So, we are comfortable moving down the corporate bond risk spectrum in return for a higher yield. We can do this in two ways, the first is by choosing companies that have a weaker credit rating and thus higher yield. And the second is taking subordinated debt in higher quality companies. Essentially, this is debt that – in terms of repayment – ranks lower in priority in the event of company default, but offers higher returns.

An example of the latter is  the yield available on financial companies like banks and insurers. We have reasonable conviction that these areas are well placed to absorb any loan defaults that may accompany recession without trouble, and that, fundamentally, these companies are sound. So we can harvest a higher income by lending to them in a subordinated structure.

Next week, we’ll return to our usual Astute Market Overview; at the start of February I’ll sit down with our Chief Investment Officer, Scott Osborne, for our full quarterly Q&A. If you have anything you’d like for us to cover, please mention it to your financial adviser.

See you then.