Haig Bathgate warns on 'gilt bubble fallout' in Citywire

Tuesday, October 16, 2012

In today's Citywire, Haig Bathgate asserts that he is sticking to his belief that the US can continue to lead the global economy out of its slump, and will not buy gilts even if the trade has a further six to 12 months to run.
 
Positioning
 
Haig continues to back managers who are able to go short duration through the Balanced fund’s 9% allocation to fixed income.
 
This reflects his view that when the gilt bubble bursts, the effects will be far worse than the environment that pervaded in the early 1990s, when government bonds sold off and yields spiked.
 
Although not holding gilts has continued to impact on performance, Bathgate still views the asset class as overvalued.
 
‘We think gilts could continue to look overvalued for six to 12 months, but when it goes it will be significant. It will be like the early 1990s, particularly the 1994 environment we saw, but larger because quantitative easing (QE) has suppressed yields and increased valuations of bonds beyond fair value,’ he said.
 
Top bond fund picks include Pimco Total Return and Legal & General’s Dynamic Bond.
 
Over the past year, the team has upped exposure to European equities slightly to 8% through the more defensive Senhouse European Focus fund, which is complemented in the portfolio by Odey European’s different approach.
 
Haig remains positive on the US and has retained a 10% exposure to Asia Pacific emerging markets over the year, while adding to Japanese exposure through the fund’s position in Stephen Harker’s GLG Japan CoreAlpha fund.
 
Performance
 
Over the 12 months to the end of September, the CF TC Balanced fund, which acts as a proxy for the asset allocation across its balanced segregated discretionary portfolios, has posted a 10.1% return, while the IMA’s mixed investment 40%-85% shares index rose 14.5% over the same period.
 
Between the beginning of October 2009 to the end of August, the strategy posted a 14% return.
 
Haig highlights manager selection as a driver of performance, with Old Mutual UK Select Smaller Companies, BlackRock UK Special Situations and Schroder ISF Asian Total Return standing out as contributors.
 
Not holding gilts has proved a dampener on performance, but the CIO remains confident on his position on valuation grounds, while also highlighting levels of debt at the sovereign level.
 
Outlook
 
Looking ahead, Haig is reasonably optimistic over the medium term and is almost fully invested as a result, although he also points to inflationary expectations that help to explain the low cash position. He remains positive on the prospects for the US economy, despite the short-term headwinds.
 
‘We are pretty positive on the US even though the economic data has started to slow. We think there are some encouraging aspects to what is going on in the US.
 
‘We are starting to see loan growth rise and borrowing costs are falling. I think we could start to see things recover as we come into the new year,’ he said.
 
Haig's shopping basket:
 
Buy: US equities
 
‘We are pretty positive on the US even though the economic data has started to slow’.
 
 
Sell: Gilts
 
‘We think gilts could continue to look overvalued’.
 
 
Hold: Strategic bonds  
 
Pimco Total Return and Legal & General’s Dynamic Bond remain top fund picks.
 
 
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