Invesco and Rathbones Cut Gilts on UK Exposure to Politics, Oil

1o4a[c78s]f1izbr7ms4g111_media_dl_2.png Morningstar

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(Bloomberg) — Fund managers including Invesco Ltd., Ninety One UK Ltd., Rathbones Asset Management Ltd. and W1M Group Ltd. have soured on UK government debt this year as worries about inflation and political instability prompt them to look elsewhere.

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In a period when multi-asset funds increased their overall allocation to bonds, the share of gilts among fixed-income assets shrank from 25% to 15% between December and June, Morningstar data show. Initially encouraged by the prospect of interest-rate cuts from the Bank of England, fund managers said they increasingly turned instead to the government debt of Germany and Japan, or high-yielding notes from Australia, New Zealand and Canada.   

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The overall volume of UK government debt held in multi-asset funds is comparatively small at £13 billion ($17.3 billion) — or just over a quarter the amount managed by dedicated UK bond funds. But the decision to trim holdings underscores the concerns investors have about Britain’s bond market, where borrowing costs are the highest of major developed nations.

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Investors were rattled by the political turbulence around local elections in May that led to the departure of Prime Minister Keir Starmer and the installation of former Greater Manchester Mayor Andy Burnham this month. Meanwhile, soaring energy prices sparked by the US-Iran war fueled bets on higher interest rates to tackle any fresh uptick in inflation.

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Matthew Parkinson, who manages about £1.9 billion at W1M Group, flipped his stance on gilts, citing “a lower conviction in the outlook for UK inflation and a greater appreciation of domestic political risk.” 

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The £883 million Multi-Asset Growth Fund, which he helps manage, cut its allocation to UK government bonds from 6.65% in December to 4.5% by May.

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David Coombs, head of multi-asset investments at Rathbones Asset Management, said he sold longer-dated gilts across a £9.8 billion portfolio of multi-asset funds because of worries that Starmer’s replacement could turn out to be less fiscally responsible.

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‘Uncertain Territory’

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Coombs said he was already dimming on gilts as far back as February, when Labour lost a former safe seat in a by election to the Green Party. That view hardened after the party’s defeat in local elections in May.

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“From that day, it was clear to us that Starmer was most likely to be challenged,” he said. “At that stage, we were into uncertain territory, which markets obviously don’t like.” 

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Multi-asset funds that invest between 40% and 60% in equities, cut their share of UK bonds by 0.84 percentage points between December and June, according to Morningstar. That figure, which included both government and corporate bonds, was the largest reduction for countries covered by Morningstar.

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German and Japanese debt was popular instead, as well as Australian, Canadian and New Zealand government bonds, which money managers said offered higher yields with less volatility.