US dollar weakness drives UK fund out of Treasuries and into gilts
Across three multi-asset funds worth a total of £1.8 billion (S$3.1 billion), London-based CG Asset Management (CGAM) has switched around £100 million out of US Treasury Inflation Protected Securities (Tips) and into UK inflation-linked government bonds since the end of March.
The move to skirt currency risk comes as the US dollar has slumped 7 per cent against the pound this year, with US President Donald Trump's unpredictable tariff policies and a widening deficit dragging on the greenback's appeal.
That depreciation now 'weighs a bit on any kind of long unhedged allocation to Tips or US conventional government bonds', portfolio manager Emma Moriarty said in an interview. She has now paused the reallocation as 70 per cent of the portfolios' exposure is sterling, a level 'at the very high end for where this would normally be'.
Within CGAM's largest multi-asset fund, the Capital Gearing Trust, the gilt linker portfolio returned 1 per cent over the second quarter whereas the Tips portfolio lost 6 per cent. Since April, Moriarty has grown holdings in UK index-linked bonds from 9 per cent to 15 per cent.
While longer maturity gilts have struggled this year given doubts about the UK's finances, Moriarty said so-called linkers have been closing the gap in performance with their American counterparts in their own right. Most linkers have gone from 'uninvestable' to 'good value', Moriarty said.
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'In relative terms, the UK is now in a much better position in that UK real yields are now quite elevated,' she added.
Still, in both markets, CGAM has shifted out of the short end of the curve after heightened short-term inflation expectations, and also out of the long-end given concerns of an economic slowdown and fiscal risks. Moriarty currently favours maturities between five and 10 years.
Historically, CGAM had favoured the US as the 'number one' most valuable inflation market as its outlook for outright real yields was 'really positive' due to expectations that they would track the relatively rapid growth rate of the US economy. But concerns over tariffs and the US dollar have changed that.
Moriarty has shrunk holdings in Tips from 28 per cent to 22 per cent in the last three months, with inflation-linked bonds hit particularly hard in April's market turbulence. The reallocation chimes with other investors also shifting money out of US dollar assets and into Europe.
'The biggest threat to the US dollar is actually just this rotation away from US assets,' Moriarty said. BLOOMBERG
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