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| Gregor MacIntosh |
Edinburgh-based Standard Life Investments is looking to invest up to £125 million, or 5% of its £2.5 billion European government bond portfolio, in long-dated inflation-linked bonds. The strategy comes in anticipation of higher inflation in Europe. The asset manager also intends to increase investments at the short-end of the curve, strengthening a barbelled investment approach and shortening the overall duration in the European government bond portfolio from 5.8 years to 5.5 years. At that point, the portfolio will be about half a year short of the benchmark's six year duration. The portfolio is benchmarked against the Merrill Lynch EMU Direct Government Index, and does not currently hold any inflation-linked debt. The changes to the portfolio are being made because Gregor MacIntosh, investment director and manager of the fund, expects rates to move against market expectations. "The market is looking at the recent economic soft patch and is pricing in a rate cut by the European Central Bank before year-end," he noted. "We believe the softness is temporary and European growth is quite robust, so we are looking for a tightening based on a rise in inflation by year-end. ECB rates may remain unchanged, but if anything, ought to go up." Specifically, MacIntosh pointed to the rise in seasonal food prices, the fact oil prices are still strong and an anticipated rise in the value added tax in Germany should the opposition party win the upcoming general election.
From a regional perspective, the portfolio will remain 15-20% underweight in Italy, Greece and Portugal. Meanwhile, part of the overweight in Ireland, Spain and Finland will be reduced and switched into German Bunds, as MacIntosh expects an opposition party win to stimulate the German economy. He is also looking to reduce his holdings in the belly of the curve; the bulk of his Irish holdings are in 10-years.
