Onside Issue 2 - Winter 2014 - 26

ONSIDE / FUNDS

WINTER IS COMING
TO THE BOND MARKETS
Investors who continue to pile into fixed-income assets or maintain significant holdings in
bonds risk being caught out by a painful market correction, two of Seneca's Senior Fund
Managers are warning.

lan Borrows and Simon Callow, Senior Fund
Managers at Seneca Investment Managers, who
manage more than £450 million in their income and
growth investment funds, say the extended bull market in
fixed-income assets is now over. The two Managers, who
have responsibility for the Seneca Investment multi-asset
range, are repositioning their portfolios accordingly and
warning other investors to do the same.
Fixed-income assets have enjoyed a remarkable run of
success since the late 1980s when central banks in most
developed markets began cutting interest rates as they
finally got on top of inflation.
Most recently, the huge programmes of quantitative easing
implemented by central banks has resulted in a major rally
in bond markets, as the unprecedented stimulus has seen
money flood into fixed income.
However, with many fixed-income assets now offering negative
yields in real terms, there seems little scope for any further
appreciation in the bond market. Moreover, leading central
banks are now beginning to consider unwinding their stimulus
programmes - and even to think about raising interest rates. In
an environment where valuations in large parts of the global
bond market have been artificially inflated - and where
yields are now unsustainably low - fixed-income assets are
now dangerously over-priced, Borrows and Callow warn.

"We're making a determined and systemic move from
bonds into real assets across our portfolios," Alan says.
"The paucity of returns in the fixed-income space makes
that essential and we're concerned about what will happen
with valuations as the monetary authorities make the shift
back into a focus on the threat of inflation."
"The quantitative easing stimulus programme has floated
many boats but once the tide goes out we'll see fixed-income
sink," he adds. "Real assets, including equities, property
and areas such as infrastructure represent a way to hedge
against the risk of rising inflation."
The warning from Seneca comes in the face of continuing
enthusiasm for fixed-income assets amongst investors -
particularly in the retail sector.
Data from the Investment Management Association shows
that investors put more than £4.5 billion into fixed-income
funds during the first half of this year.
Moreover, while institutional investors began to temper
their appetite for bond funds during the second quarter -
selling more funds than they bought between April and June
- retail investors showed no such caution. They put almost
£600 million into bond funds over the second quarter.

Table of Contents for the Digital Edition of Onside Issue 2 - Winter 2014