Welcome to the June Astute Fund Overview, our chance to explain some of our recent fund activity and positioning in response to recent events.

There were some similarities between the latest inflation print in the UK and the recent weather – both were hot! Due to unanticipated increases in categories such as communications and transport, core inflation, (which excludes energy, food, alcohol and tobacco), came in much hotter than estimated at 6.80% vs 6.20%, whilst headline inflation also surprised at 8.70% vs estimates of 8.20%.

Market expectations for interest rates instantly repriced to include a further 1.00% of tightening which, if realised, could see the Bank of England raise rates to north of 5.50%, from the current level of 4.5%. However, given the underlying weakness of the UK economy, we believe that this pricing is far too aggressive, and therefore we continued to strategically add to our gilt position to both take advantage of the recent spike in gilt yields, and also gain potential capital upside if the Bank of England were to ultimately fall short of that level.

In addition to this, we have also introduced a new fund into our global high-yield bond component. We see opportunities in this space; the high-yield market has substantially improved in quality over the last decade, a key element that is often overlooked by the market.

So that’s what we’ve added and why; what have we removed? We funded these recent trades in two ways. Firstly, our bond holdings that have lower sensitivity to interest rate increases have served the funds well in this environment, and, as we believe we are approaching the end of the interest rate hiking cycle, we have now sold some of these holdings. And secondly, in the recent environment the funds have benefited from some of the holdings in the alternatives portion of our fund, so we are trimming some of the profits to fund these purchases.

To summarise, we believe that bonds are back in town, at last, and are providing diversification against equity (or stocks and shares) risk. Whilst we are diversifying our equity risk via fixed income, we have a positive outlook, and the funds are well positioned in areas where, we believe, the significant upside potential overcomes the risks of any near-term weakness.

Although it’s always tempting to be distracted by short term price movements, we remain focused on the bigger picture, with the strong belief that positive value is generated through a well-managed portfolio over a long-time horizon.

We’ll be back next week with an Astute Market Overview, see you then.