Abbey National Asset Management is buying index-linked gilts, which have been outperforming conventional bonds of late. The move is designed to preserve capital, says Rod Jack, investment manager. Abbey has been selling off its positions in conventional government gilts and reinvesting in index-linked gilts. Jack says the firm is fully invested, but bonds are not offering any value at the moment with yields so low. He is worried about inflation rising on the back of increased U.K. taxes and the rate cuts by the Bank of England designed to stimulate growth.
The firm, which manages roughly £4.5 billion in fixed-income assets, has been selling 10-, 17- and 20-year conventional gilts and buying index-linked gilts of the same maturities. Jack says he opted for this move, because does not wish to be underweight government bonds, but at the same time yields are unsustainable at these levels. Last Monday, the 10-year gilt was yielding 4.05%. Roughly 10% of Abbey's total fixed-income assets are now in inflation-linked bonds.
For the time being, Jack is risk averse because he is concerned about the global economic recovery. "If we are fortunate enough to have a short conflict [in Iraq], things may bounce back, but it's not that easy to predict," he says. Still, he notes that U.K. consumer confidence is down and that the impact on growth of higher oil prices and lack of investment will have a knock on effect. "We have to look for places to hide, unfortunately there are not many places," he says. Abbey National benchmarks its gilt portfolios against the All Stoxx index, which has a duration of 6.6 years and the FT over 15-year bond index, which has a duration of 12.5 years.
