Chief investment officer and fund manager Neil Birrell said his Premier Diversified Fund has “virtually no exposure” to government bonds, investment grade and the upper end of high yield because of higher-than-expected inflation and the market’s view that rates will not rise as quickly as central banks suggest.
He said: “It’s all about what markets expect and at the moment they expect rates and inflation to remain lower than central banks are expecting.
“That is certainly true in the US where investors simply don’t believe what the Federal Reserve is saying and therein lies the risk to bond markets, and this is possibly the biggest risk to asset prices today.
“We will stay away from any significant exposure to traditional bonds until the risk and reward profile looks attractive.”
Birrell’s other fund, the Premier Diversified Income Fund, launched in June, has a 30% weighting to fixed income but only 13% of that is allocated to conventional bonds.
The rest is in alternative fixed income, most notably specialist lending vehicles.
He said the capital restrictions places on banks since the financial crisis has meant traditional sources of finance have dried up and allowed specialist lenders to enter the market. This has created the opportunity to make attractive returns in sections of the market that are not correlated to traditional equity and bond markets.
Premier is achieving this through expert managers within closed-ended investment company structures investing in secured loans to a wide range of sectors and industries.
Examples of this include equipment leasing and asset financing investment company, SQN Asset Finance Income, which Birrell said “provides the Premier Diversified Income Fund with exposure to fixed income in an interesting area that shouldn’t be highly correlated with traditional bonds”.
Additionally, Birrell highlighted life sciences industry lender BioPharma Credit as attractive because it “provides investors access to a diversified portfolio of loans backed by royalties and other cash flows from the sales of life sciences products”.
He added: “Simply, the healthcare industry has attractive long-term growth characteristics and needs to be financed. Specialist lenders such as BioPharma are able to take part in this and provide an attractive diversified exposure to fixed income markets for the Premier Diversifed Fund, which, again, shouldn’t be correlated with traditional bond markets.”