Scottish Friendly, which manages £122 million in bonds, has shortened duration as prospects for out-performance in the gilt market dwindle. "We're moving closer to our benchmark's duration as prospects for gilts and fixed interest relative to equities have taken a turn for a worse," says investment director Julian Fosh. "Inflationary pressures are on the increase and that being the case we want to shorten duration as a defensive move because longer dated [bonds] are in for a rough ride," he adds.
Scottish Friendly has moved slightly shorter its benchmark, the Life Fund Index, which is eight years. At the moment, Scottish Friendly has approximately 30% in three- to five-year gilts, 40% in the five- to 15-year medium band and 26% in over 15-year long bonds.
Fosh says he's concentrating on the middle of the range, because "it's clear there has been a switch in the tone of the market, and there is not as good a climate for gilts and we see value in the middle of the maturity curve rather than the end."
Fosh reckons there is a 60% chance the Bank of England will raise rates by either a quarter or half-percent by year-end. If the increase is 50 basis points or more, he will switch a further 6% of the firm's long bond allocation into shorter-dated bonds.
