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Absolute return fixed-income offers diversification in volatile markets, says Barings

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Investors in search of uncorrelated assets and growth potential in volatile markets should look to absolute return fixed-income strategies, which h

Investors in search of uncorrelated assets and growth potential in volatile markets should look to absolute return fixed-income strategies, which have the potential to generate returns even when markets are in decline, making them ideal for portfolio diversification in times of market volatility, according to Baring Asset Management.

“In these uncertain times it is proving extremely difficult for investors to plan rational strategies while markets are behaving irrationally,” says Rod Aldridge, Barings’ head of UK retail distribution.

“Against a background of rising risk aversion and uncertainty [where] some traditional investment strategies face underperformance, we encourage investors to consider an absolute return fixed-income strategy designed to generate absolute returns uncorrelated to other asset classes.”

The Baring Directional Global Bond Trust offers investors the potential to deliver positive returns in all investment condition, according to manager Colin Harte (photo), who says: “We aim to be on the right side of moves in the fixed income government bond and currency markets. The fund can be long of markets and currencies when they are rising and, importantly, has the ability to be short in order to profit when they are falling.

“We have recently become more cautious on the outlook for global bond markets as the flight to quality, with investors selling equities in favour of safe-haven assets, has pushed government bond yields down to extreme levels.

“We have built a sizeable short position in government bonds, predominantly US Treasuries. We believe the policy stance of the world’s monetary authorities, which have stepped in to support financial systems and stimulate economic growth, will prove expansionary, pushing inflation higher and eroding the value of bonds. In the currency markets we have moderated our net long position in US dollars from 40 to 20 per cent in a move designed to reduce risk, offset by short positions in the euro and sterling.”

The investment strategy of the trust is contrarian, and Harte gradually builds positions against the prevailing trend. He looks at the macroeconomic picture and forecast using a scenario-based approach, rather than single-point forecasting.

“Given the extreme levels of investor uncertainty, we expect the current very high levels of volatility to persist,” Aldridge says. “This should support the performance of the Directional Global Bond Trust, since our experience has been that the scenario-based investment process works well in times of volatility. Furthermore, the trust has a very low correlation with returns from other asset classes, making it a very useful diversification tool for investors.”

Launched in March 2004, the fund was the UK’s first long/short unit trust. The trust has an initial charge of 5 per cent and an annual management charge of 1.75 per cent, with a minimum investment of GBP1,000 or GBP10,000 (institutions).

It has returned 15.6 per cent over the 12 months to the end of September 2008, according to Morningstar, compared with an average of  5.6 per cent for the IMA Global Bonds sector. It has also outperformed the IMA Absolute Return sector, whose best performer delivered 7.31 per cent over the same period.

Baring Asset Management, a subsidiary of the MassMutual Financial Group, is active in developed and emerging market equity, fixed income and multi-asset portfolio management services for institutions such as public and corporate pension plans, government agencies, financial institutions and charitable organisations as well as retail investors and private individuals.

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