Atlantic House Investments has launched a dynamic duration fund which aims to provide multi-asset investors build a more 'predictable' fixed income strategy.
The new Dynamic Duration fund, which will be lead managed by veteran investor Mark Greenwood, aims to help multi-asset managers get the right balance between duration and risk, alongside traditional fixed income exposures, to diversify the fixed-income allocation within a portfolio.
The strategy is designed to perform in both inflationary and deflationary environments by systematically pivoting between exposure to conventional fixed income and target exposure to inflation itself.
Deputy chief executive Greenwood, who was formerly at Merian Global Investors, said the strategy will use three liquid instruments – government bonds, interest rate swaps and inflation swaps – equally applied between the UK and US markets.
It tilts its exposure to fixed income and inflation-linked assets based on three 'signals': inflation trends, real yields and current levels of core inflation relative to central bank policy targets.
These three signals provide an estimation of the likelihood of a future increase or decrease in UK and US interest rates and inflation which in turn systematically determines the Fund’s positioning across fixed income and/or inflation.
- Inflation Trend – Downward trending inflation may lead central banks to cut interest rates, increasing the value of fixed income assets while, conversely, inflation trending up may favour investments in inflation swaps.
- Market Inflation Credibility – A higher real yield on inflation-linked bonds indicates a market expectation of lower inflation increasing the appeal of fixed income. A negative real yield, meanwhile, implies higher inflation which favours inflation swaps.
- Central Bank Credibility – If core inflation is below target, central banks are less likely to increase interest rates making fixed income attractive. However, if it is above target, investors may benefit from investment in inflation swaps.
Greenwood said: "The Atlantic House Dynamic Duration fund is a strategy designed for investors seeking the diversification from equities that they might have looked to conventional bond funds to provide.
"The duration exposure of such funds can create substantial risks in an environment of changing interest rates as it is notoriously difficult for fund managers to navigate these shifting currents.
"However, the systematic approach applied by this new strategy offers the potential for performance in both inflationary and deflationary environments by tilting dynamically to fixed income or inflation assets."
He added that the fund's systematic approach can complement multi-asset investors’ exposure to active strategies by eliminating individual behavioural biases.
Tom May, chief executive of Atlantic House Investments, said: "Choosing how much duration to own in a multi-asset portfolio is both highly-challenging and highly-important. This new strategy introduces a systematic approach to this.
"We believe that multi-asset investors can use it alongside more traditional fixed income exposures to better diversify portfolios and enhance returns during periods when the inflationary environment is changing rapidly."
Additional information:
Share classes: Sterling accumulation and income, US Dollar hedged accumulation and income
Base Currency: Sterling
Type: Global Government Bond
OCF: 40bps
