MARKETING - The PRIDE Magazine by Liontrust - Flipbook - Page 16
INVE S T MEN T U P DATE S
SUSTAINABLE INVESTMENT - FIXED INCOME
Fund managers: Stuart Steven, Kenny Watson, Aitken Ross
This summer marked a decade since the last interest rate rise in the UK. Liontrust’s Sustainable
Investment Fixed Income team looks at whether this is about to change.
The global interest rate story is changing,
with central banks shifting to tighter
policies as the financial crisis moves
further into the rear view mirror. This
movement is led by the US Federal
Reserve, which in June 2017 raised US
rates for the fourth time since the crisis.
More recently, there has been much
speculation over when the European
Central Bank and Bank of England
will ‘normalise’ their policies – starting
the process of raising interest rates
back towards more historically typical
levels and ending or reducing their
substantial bond-buying Quantitative
Easing programmes.
overvalued. When interest rates move
up, so too do bond yields, with the effect
being that their prices must fall – this is a
key risk currently facing many investors in
bonds. We want to minimise exposure
to this potential capital loss so we take
an active approach to managing our
exposure to interest rate risk, which is
often called ‘duration’. We pick bonds
we believe to be undervalued, but if they
carry more interest rate risk than we are
prepared to accept (rate risk tends to be
greater with bonds that have a longer
time before they redeem), we can use
derivatives such as futures to ‘hedge out’
some – or all – of this risk.
Against this backdrop, we remain of the
view that government bond markets are
As well as this flexibility to minimise
interest rate risk, we are also able to
“
target performance through good stock
selection (choosing to buy the bonds
of companies whose credit quality is
underappreciated) and more complex
strategies, such as currency hedging, to
reduce volatility in uncertain periods. The
UK election offered us an opportunity
to deploy some of these strategies, for
example. Ahead of the vote, we felt
that markets had under-priced the risk
of the Conservatives failing to achieve
a majority, leading us to hedge against
sterling by buying US dollar exposure to
provide some protection.
We believe that our core position of
low interest-rate sensitivity will now
prove valuable given the new uncertain
political and economic outlook.
Over half of new power
generation capacity added
in 2016 across the globe
was from renewable
technologies.
“
SIMON CLEMENTS
Sustainable Investment Team
16 - THE P R I DE - Issue 1 Winter 2017