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Scottish Manager Holds Onto Cash

23 Feb 2003

Scottish Widows Investment Partnership is keeping a large cash position in its U.K. bond fund, because it is cautious about the bond market on the whole. David Millar, head of government bonds at the Edinburgh-based manager, says that although he is seeing a slow and gradual economic recovery, he is aware of the geopolitical risks out there, which is making the firm cautious about expressing a strong opinion. The £125 million U.K. bond fund holds government and corporate bonds and uses the Barclays Capital sterling all-stocks index as its benchmark.

The manager is underweight in long-dated gilts because there is increased government supply as well as a number of Public Finance Initiative issues that have caused the long-end to under-perform significantly. Demand for long-dated sterling paper doesn't seem to be as high as it was thought, he notes. "There seems to be enough to go around at the moment. The long-end could cheapen up further before the auction at the end of the month," he adds.

The short-end of the gilt curve is pricing in further rate cuts, and has become expensive. So, Millar is concentrated in the middle of the curve and has a 8-9% cash holding. "We're thinking bond yields will rise in the medium-term, and we're happy to run with an element of cash in the portfolio for sometime," says Millar. In addition, the fund is 0.25 years short its benchmark's 7.7-year duration.

23 Feb 2003