Last Word
Perspective
ARTICLE
01
Fund Manager
VIDEO
02
Square Mile
03
Fund Buyer
REACTIONS
04
strategy directly from the fund managers themselves.
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research and market views together with an explanation of the
The Allianz Gilt Yield Fund generates alpha using five tools, duration, anomalies on the yield curve, relative value switches, cross market strategies (although these are always hedged back to sterling), and inflation-linked bonds.
Axis analyses the fund from four perspectives to bring you insight,
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Review By Nicola Brittain
COMPANY_ Last Word
The fund invests (primarily) in British government securities and takes a top-down approach. It aims to beat the benchmark gross of fees by 50 basis points a year (20 basis points net of fees).
Scroll down to read more...
“The fund takes advantage of market inefficiencies to deliver alpha across its portfolio of gilts.”
JOB TITLE_ Investment Writer
YEARS IN INDUSTRY_ 17
LOCATION_ London
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at Last Word
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NICOLA BRITTAIN_
NICOLA BRITTAIN
The fund has outperformed all competing passive funds in the universe, net of fees.
COMPANY_ Square Mile Investment
To view Square Mile Investment Consulting and Research Ltd's disclosure on their involvement on this site, please click here.
JOB TITLE_ Investment research analyst
P_
“As markets become more challenging the team’s careful consideration of the various fundamental, valuation, sentiment and technical factors that drive the market should stand the fund in good stead.”
The Allianz Gilt Yield Fund offers investors active investment management within the UK government bond asset class. The fund’s manager, Mike Riddell, carefully selects the maturity of individual bonds, as well as the average maturity of all the bonds in the fund in order to actively manage the fund’s duration (interest rate risk). He is able to deviate from the fund’s benchmark duration by up to two years, as well as hold up to 20% of the fund in other, equally reputable, government bonds.
Scroll down to read more...
YEARS IN INDUSTRY_ 6
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PAUL ANG_
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PAUL ANGELL_
PAUL ANGELL
Last Word
Perspective
The Allianz Gilt Yield Fund has benefitted from Quantitative Easing (QE) in recent years, but it is unlikely to struggle as central bank policy changes since it can deploy a number of alpha-generating strategies to manage changing economic conditions.
The fund draws alpha from the following five sources: duration, anomalies on the yield curve, relative value switches, cross market strategies (although these are always hedged back to sterling), and inflation-linked bonds, which the fund managers think offer superior value. Another key differentiator, according to lead fund manager Mike Riddell, is the low price of the main institutional share class at 32bps.
The fund was launched in 2002 and has been run by Riddell since 2015. The fund invests (primarily) in British government securities (although it does buy other AAA countries but then hedges them back). It currently holds 33 unique gilts.
The managers determine the real value of a gilt using a global top-down approach. The fund has a soft target (gross of fees) that aims to beat the benchmark by 50 basis points a year, (20 basis points net of fees). The fund has achieved its target every year so far and has been the top performing conventional gilt fund in its sector since launch.
The gilt market is dominated by passive funds but there are inefficiencies here too. A passive fund that perfectly replicates the benchmark will still leave the fee-paying end investor below the index. Similarly, a passive fund has to rebalance over time as prices change and this can be very costly. Divergence caused by cumulative, compounded divergence has led to underperformance versus the benchmark of 43.2%.
How would the fund fare in the face of a rise in inflation? Lead manager Mike Riddell said: “UK inflation has been above target for a few years now, and this is almost entirely due to Sterling moves. Sterling has stabilized and strengthened in the last 12 months but we expect it to fall pretty sharply over the next six months. The view on UK inflation is linked to your view on Sterling. If we get a soft Brexit and Sterling rallies then UK inflation could fall sharply. This would be beneficial for the gilt market.
Allianz Global Investors are one of the biggest bond investors in the world and the team, which consists of lead manager Riddell, co-manager Kacper Brzezniak, and 15 portfolio managers who are experts in fixed-income, benefits from the company’s rich resource and experience.
Cleverly managed fund draws alpha from five sources
AUTHOR_ NICOLA BRITTAIN
The team gauges performance on the fund by comparing it with the FTSE Actuaries UK Conventional Gilts All Stocks Total Return Index, and describe themselves as ‘benchmark aware’ without being constrained by it. The fund is measured over a full investment cycle of three-to-four years.
The bond market is huge and very liquid but it is also inefficient in several respects - the fund takes advantage of this. Repeatable anomalies include those linked to supply events such as a debt management via a particular debt issue leading to big moves on the curve.
Other inefficiencies come from non-economic investors such as banks and insurers fulfilling mandated guidelines, as well as liability hedging and currency management requirements. Similarly, constrained investment-bank balance sheets and the loss of bank prop desks have further reduced the number of active participants who can arbitrage away pricing anomalies.
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Kames Global Diversified Income Fund
Fund
Vincent McEntegart has been managing the Kames Global Diversified Income Fund for six years and is well-versed to the changeable financial climate. Curabitur blandit tempus porttitor. Aenean lacinia bibendum nulla sed consectetur.
Manager
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Duration represents the major risk to an investors’ total return in the gilt market. We therefore take some comfort from the fact that active managers, in this instance Mr Riddell, can position the fund relatively defensively in a rising yield environment, thereby protecting investors, at least in a relative sense.
The fund’s investment parameters allow Mr Riddell to go up to two years overweight or underweight duration relative to the index, a duration range that he has used confidently during his management of the fund. In the event of a predicted sell-off in the UK government bond market, Mr Riddell can also position up to 20% of the fund in ‘cross-market’ positions. This would see him take holdings in other government bond markets with a credit rating equivalent to or higher than that of the UK. We believe this is a helpful diversifier for this fund given the gilt market can be challenging from a total return perspective at certain points in the cycle.
Overall this is a well-managed fund with a team of intelligent and considered investors. Few managers can justify charging active fees in this space but we believe this fund is an exception.
AUTHOR_ PAUL ANGELL
"We believe that finding inefficiencies within the UK government bond market is no mean feat. Mike Riddell is a sensible and thoughtful investor, and, although he hasn’t worked on the fund that long, he has proven that that he is able to consistently generate alpha in a tough market for active managers. We would recommend this fund to investors looking for actively managed UK government bond exposure."
Within the management process Mr Brzezniak focuses on relative value opportunities within the investment universe. This is a central responsibility that we believe will remain key to the fund continuing to outperform passive alternatives over time. We were also pleased to see Jack Norris added to the team more recently. Mr Norris’ modelling expertise has helped the managers identify more opportunities than they might otherwise have, as well as alleviating some of the administrative burden of running an investment fund.
While the UK government bond market is relatively efficient on the whole, we appreciate that active managers can improve risk adjusted returns. Over much of Mr Riddell’s tenure on this fund, market consensus has been that UK interest rates will rise, however Mr Riddell has generated alpha from actively trading duration. As markets become more challenging the team’s careful consideration of the various fundamental, valuation, sentiment and technical factors that drive the market should stand the fund in good stead.
We have been impressed with Mike Riddell’s management of this fund since he became the fund manager back in November 2015. Over this period, Mr Riddell has outperformed all competing passive funds in the universe, net of fees. As such, the fund more than justifies its active management fees, in our opinion (these are approximately three times higher than the leading passive alternatives, with an annualised OCF of 32 basis points). We believe this fund is therefore a clear example of an actively managed fund that offers investors value for money.
Mr Riddell is an intelligent and engaging investor. He has an evident passion for investing in UK government bonds and has shown a knack for anticipating market movements at different parts of the UK government bond curve throughout his management tenure.
Mr Riddell is capably supported by his co-manager Kacper Brzezniak, who joined Allianz Global Investors in July 2016. Mr Brzezniak is another intelligent investor who evidently enjoys the macroeconomic debate and academic challenge that comes with running a UK gilt fund.
Riddell has a knack for anticipating market movements at different parts of the UK government bond curve
Paul Angell, Investment research analyst, Square Mile Investment
Square Mile
Perspective
Fund buyers' perspective
Four fund buyers provide their views on where the Allianz Gilt Yield Fund sits in a portfolio, and why it is good value for money.
Market Reaction
Next
Jonathan Woo_ investment research_ Santander Asset Management
×
“There has been considerable structural reform in giant markets like India, China and the Pacific Tiger economies. It’s a time of change from investment in infrastructure to innovation. Baillie Gifford looks for superior growth, meaning its style is suited to this change. They make some debatable valuations but are valiant investors and can spot businesses with great fundamentals early. They are picking the sort of businesses that have the potential to steam ahead and accrue multiple years of earnings growth for investors.”
Scott Spencer_ Investment Manager_ F&C Multi-manager solutions, BMO Global Asset Management
“The key rationale behind Income Maximiser is the delivery of a 7% yield. The use of derivatives in the portfolio means the upside is therefore limited but we find the fund is a lower beta way of getting equity exposure as well as some downside protection.”
“The fund managers of Schroder Income [Nick Kirrage and Kevin Murphy] pick the stocks, and the derivatives for Income Maximiser are then written accordingly. We like the fact that derivatives provide a diversification element and we have a great deal of confidence that the derivatives are run by a separate team. It is a very different skill set and is a USP of theirs.”
Richard Philbin_ CIO_ Wellian Investment Solutions
Mona Shah_ head of collectives_ Rathbones
“After years of lacklustre performance, Asia and the emerging world experienced a resurgence last year, driven by rising commodity prices and a fundamental shift in favour of more cyclical sectors like financials, energy and materials. But many of the fortunes of Asia and emerging markets are driven by sentiment from the West, which was negatively affected by the US election in November. While markets have regained their initial losses, we’ve had no more clarity on what Donald Trump’s policies will mean with regards to global trade and protectionism. For this reason, we believe that diversification should offer benefits in a period where markets are likely to be volatile. In addition, the economies in Asia-Pacific are showing increasing dependence on domestic demand, and we believe funds exposed to growing demand from consumers in China, for example, may be better placed to withstand headwinds from the US.”
Robert Shepherd_ Director_ Bright & Co.
We were on the lookout for something different and, let’s face it, 4% or lower is the norm in this environment. So this is attractive”
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Achievable, sustainable, reliable
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Fund
Manager
Perspective
Fund Buyer
Perspective
This demo version has been optimised for desktop, laptop and tablet. Smartphones, iPhones will be supported in the next version.
to bring you insight, research and market views
together with an explanation of the strategy
directly from the fund managers themselves.
Axis analyses the fund from four perspectives
The fund invests (primarily) in British government securities and takes a top-down approach. It aims to beat the benchmark gross of fees by 50 basis points a year (20 basis points net of fees).
Scroll down to read more...
Review By Nicola Brittain
The gilt market is dominated by passive funds but there are inefficiencies here too. A passive fund that perfectly replicates the benchmark will still leave the fee-paying end investor below the index. Similarly, a passive fund has to rebalance over time as prices change and this can be very costly. Divergence caused by cumulative, compounded divergence has led to underperformance versus the benchmark of 43.2%.
How would the fund fare in the face of a rise in inflation? Lead manager Mike Riddell said: “UK inflation has been above target for a few years now, and this is almost entirely due to Sterling moves. Sterling has stabilized and strengthened in the last 12 months but we expect it to fall pretty sharply over the next six months. The view on UK inflation is linked to your view on Sterling. If we get a soft Brexit and Sterling rallies then UK inflation could fall sharply. This would be beneficial for the gilt market.
Allianz Global Investors are one of the biggest bond investors in the world and the team, which consists of lead manager Riddell, co-manager Kacper Brzezniak, and 15 portfolio managers who are experts in fixed-income, benefits from the company’s rich resource and experience.
The Allianz Gilt Yield Fund has benefitted from Quantitative Easing (QE) in recent years, but it is unlikely to struggle as central bank policy changes since it can deploy a number of alpha-generating strategies to manage changing economic conditions.
The fund draws alpha from the following five sources: duration, anomalies on the yield curve, relative value switches, cross market strategies (although these are always hedged back to sterling), and inflation-linked bonds, which the fund managers think offer superior value. Another key differentiator, according to lead fund manager Mike Riddell, is the low price of the main institutional share class at 32bps.
The fund was launched in 2002 and has been run by Riddell since 2015. The fund invests (primarily) in British government securities (although it does buy other AAA countries but then hedges them back). It currently holds 33 unique gilts.
The managers determine the real value of a gilt using a global top-down approach. The fund has a soft target (gross of fees) that aims to beat the benchmark by 50 basis points a year, (20 basis points net of fees). The fund has achieved its target every year so far and has been the top performing conventional gilt fund in its sector since launch.
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Income
target_
Size of
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m
Launch date_25/02/2014
Performance
year to date_
Number of
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%
.
Kames Diversified Monthly Income Fund
pa paid monthly
Performance
since launch_
Total return
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Mike joined Allianz Global Investors on October 1st 2015 as a fixed-income portfolio manager. Mike has nearly 15 years’ experience in fixed income having worked with M&G in London for 12 years. Riddell’s has broad and wide experience in bonds, emerging markets and global mandates.
Kacper Brzezniak
Mike Riddell
Portfolio Manager
Lead Portfolio Manager
Kacper joined the firm in July 2016 as a portfolio manager after around seven years’ experience across multiple macro asset classes. He has particular expertise in derivatives, and has worked in Europe, the Middle East and the US, trading both G10 and emerging market products.
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Scroll down to see what Square Mile has to say.
Scroll down to see what Square Mile has to say...
The Allianz Gilt Yield Fund offers investors active investment management within the UK government bond asset class. The fund’s manager, Mike Riddell, carefully selects the maturity of individual bonds, as well as the average maturity of all the bonds in the fund in order to actively manage the fund’s duration (interest rate risk). He is able to deviate from the fund’s benchmark duration by up to two years, as well as hold up to 20% of the fund in other, equally reputable, government bonds.Scroll down to read more...
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to bring you incisive analysis, research and
Fund Manager’s own investment strategy.
Axis interrogates the fund from four perspectives
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The fund invests (primarily) in British government securities and takes a top-down approach. It aims to beat the benchmark gross of fees by 50 basis points a year (20 basis points net of fees).
Review By Nicola Brittain at Last Word
Click for sound
mandates. Kacper Brzezniak, Portfolio Manager Kacper joined the firm in July 2016 as a portfolio manager after around seven years’ experience across multiple macro asset classes. He has particular expertise in derivatives, and has worked in Europe, the Middle East and the US, trading both G10 and emerging market products.
Mike Riddell, Lead Portfolio Manager Mike joined Allianz Global Investors on October 1st 2015 as a fixed-income portfolio manager. Mike has nearly 15 years’ experience in fixed income having worked with M&G in London for 12 years. Riddell’s has broad and wide experience in bonds, emerging markets and global
The Allianz Gilt Yield Fund offers investors active investment management within the UK government bond asset class. The fund’s manager, Mike Riddell, carefully selects the maturity of individual bonds, as well as the average maturity of all the bonds in the fund in order to actively manage the fund’s duration (interest rate risk). He is able to deviate from the fund’s benchmark duration by up to two years, as well as hold up to 20% of the fund in other, equally reputable, government bonds. Disclaimer »
Paul Angell, Investment research analyst,
Square Mile Investment
We have been impressed with Mike Riddell’s management of this fund since he became the fund manager back in November 2015. Over this period, Mr Riddell has outperformed all competing passive funds in the universe, net of fees. As such, the fund more than justifies its active management fees, in our opinion (these are approximately three times higher than the leading passive alternatives, with an annualised OCF of 32 basis points). We believe this fund is therefore a clear example of an actively managed fund that offers investors value for money.
Mr Riddell is an intelligent and engaging investor. He has an evident passion for investing in UK government bonds and has shown a knack for anticipating market movements at different parts of the UK government bond curve throughout his management tenure.
Mr Riddell is capably supported by his co-manager Kacper Brzezniak, who joined Allianz Global Investors in July 2016. Mr Brzezniak is another intelligent investor who evidently enjoys the macroeconomic debate and academic challenge that comes with running a UK gilt fund.
“Performance of the strategy has been reasonable in a market where yields have lacked clear direction and with Brexit looming large. The strategy actually takes more rate risk than one might think when observing the return profile, and the team are not shy of dialling duration both up and down, avoiding any persistent long or short bias. At a time when rates volatility might reasonably be expected to pick up and the ‘Brexit’ risk premium oscillates there should be some caution around outsized duration bets. The fund would typically sit as a core component of a UK bond portfolio or provide broad diversification within a multi-asset solution.”
Alex Harvey_ Portfolio Manager_ Momentum Global Investment Management
Simon Molica_ Fund Manager_ AJ Bell
"The team considers five key sources for alpha generation, namely; duration management, curve positioning, relative value, cross market and inflation. As such, performance will be driven very much by success in these areas. It is interesting that the fund managers haven’t structurally been short duration as most have in this space, this has helped performance since Mike Riddell assumed responsibility for the mandate in 2015. In our view, the fund benefits from a pragmatic manager who uses a variety of tools to seek incremental value in what remains a challenging area."
Shakhista Mukhamedova_ Research Analyst_ Brewin Dolphin Fund
“At Brewin we use the Allianz Gilt Yield Fund as a core diversifier in clients’ portfolios, with the fund continuing to show its utility during bouts of equity market stress. Of course, gilt funds are not a hedge against all types of equity market corrections; and there is plenty of evidence that inflationary pressures are building, particularly in the US. But while the US may be firing on all cylinders, challenges in both China and Europe also threaten a more troubling period ahead. The defensive qualities of the Allianz Gilt Yield Fund strategy should allow portfolio managers to raise funding amid growth disappointments, enabling them to take advantage of attractive valuation in riskier assets.”
Tom Buffham_ Senior Investment Analyst_ Octopus Investments
“The Allianz Gilt Yield Fund is our only active gilt manager within our portfolios. Our research of active managers in the gilt space revealed that they often take too little risk to generate outperformance above their fees, making passive trackers more appealing in the space. However, Mike Riddell takes significantly more active risk (tracking error) and has delivered consistent outperformance over his three years at Allianz Global Investors. We particularly like that the fund managers use diverse alpha sources to generate returns, which increases the consistency of their alpha. These include: duration, yield curve positioning, cross-market investments, inflation trades and relative value.”
and market views together
Axis analyses the fund
strategy directly from the
from four perspectives to
bring you insight, research
fund managers themselves.
with an explanation of the
Review By Nicola Brittain
at Last Word
Click for sound
Mike Riddell, Lead Portfolio Manager Mike joined Allianz Global Investors on October 1st 2015 as a fixed-income portfolio manager. Mike has nearly 15 years’ experience in fixed income having worked with M&G in London for 12 years. Riddell’s has broad and wide experience in bonds, emerging markets and global mandates.
Kacper Brzezniak, Portfolio Manager Kacper joined the firm in July 2016 as a portfolio manager after around seven years’ experience across multiple macro asset classes. He has particular expertise in derivatives, and has worked in Europe, the Middle East and the US, trading both G10 and emerging market products.
Alex Harvey_ Portfolio Manager_
Momentum Global Investment Management
Tom Buffham_ Senior Investment Analyst_
Octopus Investments
"The Allianz Gilt Yield Fund is our only active gilt manager within our portfolios. Our research of active managers in the gilt space revealed that they often take too little risk to generate outperformance above their fees, making passive trackers more appealing in the space. However, Mike Riddell takes significantly more active risk (tracking error) and has delivered consistent outperformance over his three years at Allianz Global Investors. We particularly like that the fund managers use diverse alpha sources to generate returns, which increases the consistency of their alpha. These include: duration, yield curve positioning, cross-market investments, inflation trades and relative value."
Scroll down to see what the Fund Managers have to say...
Scroll down to see what the Fund Buyers have to say...
Fund size_
as at 18/10/2018
Allianz Gilt Yield Fund
AMC_
Benchmark_
Launch date_
FE risk score_
FT
FTS
FTSE
FTSE A
FTSE Ac
FTSE Act
FTSE Actu
1
2
FTSE Actua
3
FTSE Actuar
4
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5
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6
FTSE Actuaries
7
FTSE Actuaries U
8
FTSE Actuaries UK
9
FTSE Actuaries UK
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Con
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Conv
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Conve
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Conven
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Convent
FTSE Actuaries UK
Conventi
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Conventio
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Convention
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Conventiona
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Conventional G
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FTSE Actuaries UK
Conventional Gi
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Conventional Gil
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FTSE Actuaries UK
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Conventional Gilts
Tom Buffham_ Senior Investment Analyst_ Octopus Investments
Simon Molica_ Fund Manager_ AJ Bell
“The team considers five key sources for alpha generation, namely; duration management, curve positioning, relative value, cross market and inflation. As such, performance will be driven very much by success in these areas. It is interesting that the fund managers haven’t structurally been short duration as most have in this space, this has helped performance since Mike Riddell assumed responsibility for the mandate in 2015. In our view, the fund benefits from a pragmatic manager who uses a variety of tools to seek incremental value in what remains a challenging area.”
Alex Harvey_ Portfolio Manager_ Momentum Global Investment Management
Data as at 02 Nov ’18.
Who owns gilts?
Source: Allianz
Banks and
building societies
Overseas
investors
27%
Insurance
companies
& pension
funds
26%
Asset
purchase
facility
23%
9%
Households
5%
Other financial
institutions
8%
Portfolio structure maturity breakdown (%)
Data as at 02 Nov ‘18
0-1 years
30-40 years
15
20-30 years
1-3 years
10
20
25
10-20 years
5-10 years
40-50 years
50+ years
3-5 years