A report in Investment Week today suggests that some fund managers are ‘shorting’ gilts in expectation of an extreme correction.
Both M&G and Thames River bond fund managers have taken short positions on gilts in recent weeks.
Going short on an asset allows an investor or fund manager to profit from a fall in its value.
Should the price of gilts go down, the fund managers will receive a positive return for their short positions. Of course they will also lose money should gilts rise further in value.
What has prompted this position is a belief that gilt yields have reached ‘extreme’ lows.
In recent weeks we have seen the yield on a 10-year government bond reach the historical lows of a shade under 2%.
At that level, there is very little further that gilt yields can fall.
If gilt yields do experience a sharp correction, with yields rising say 20 or 30 basis points in a short period of time, then fund managers will be rewarded for taking these short positions.
Shorting is not an investment tool generally available to retail investors. Instead, they must rely on their asset allocation decisions and the decisions taken by fund managers to position funds accordingly.
Given these recent fund manager decisions and the very low level of gilt yields, is now the time to get out of gilts?
We would argue that investment portfolios need to be well diversified and this includes an allocation to gilts.
At the start of the year, our Investment Committee made the tactical decision to cut our exposure to this asset class, retaining our underweight position in gilts but making further cuts to allocations in the model portfolios we manage.
We pointed out at the start of the year that gilts look poor value at their current yields, offering a limited upside potential to investors.
As with any investment decision, you should position your pension or investment portfolio according to your wider financial objectives and the risks you are prepared to take with your money.
Now might be an appropriate time to cut back on high levels of exposure to gilts, in case they should suddenly fall in value.
Getting out of gilts altogether would be a very dramatic decision which is best left to full-time investment professionals who can attempt to time the market very quickly.
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