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Astute Fund Overview - October 2023


Hello, and welcome to the latest Astute Fund Overview. This is a chance for you to look under the bonnet at recent activity in the VT Astute Funds in today’s economic climate.

Since our last update, the Bank of England increased the base rate from 4.5% to 5.25%, our attraction towards bonds has grown, and we have increased investment in this area.

We’ve touched upon our positive bond outlook previously (to the point that perhaps we’re starting to feel like a broken record), but it is useful to remember that it really wasn’t that long ago that bonds were firmly not in favour. In fact, it has only been within the last 12 months that the outlook has changed. After 14 years of incredibly high bond prices, meagre income and unattractive capital return prospects, the popping of the bond bubble makes for a much more attractive entry point. Whilst bonds have their vital place supporting the diversification of a portfolio (almost like the ballast in a ship), there has been good reason to underweight our exposure to bonds when seeking capital return.

So, why are they attractive now? With rising cash rates, yields on bonds have also increased, and they provide an attractive return potential for the funds irrespective of whether we see painful, or short and shallow recessions emerge. Given the potential for the price of the bond to increase following future interest rate cuts, and the attractive, long-term income payable, the bond holdings will provide benefits for the fund for both the short-term and long-term.

Delving a bit deeper, yields have increased for bonds with longer maturities (e.g. 30 years left to run). This doesn’t happen very often, and is largely due to a change in the long-term expectations of interest rates.

How have we taken advantage of this? We’ve increased our exposure to corporate bonds, and more recently, have added US treasury bonds and UK government bonds with a long time to maturity.

For the UK government bond purchase specifically, we are happy to either hold it until it matures and reap the income, or sell it in future for a profit. Due to this, we have been able to take advantage of buying a gilt (or UK government bond) directly.

The capital return prospect for these holdings is very good in a negative economic growth environment; if this doesn’t materialise, the income alone is attractive.

We are currently looking to include some structured products in the funds – these investments will essentially allow us to add some upside in the event that equity markets remain stable.

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

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