He commented that as a multi-asset investor he is ‘underweight’ bonds at the present time, as rising inflation expectations, particularly in the US are likely to negatively impact on bond markets.
Higher growth and inflation expectations are generally regarded as bad news for fixed income, because the purchasing power of the income generated from the bonds is reduced.
Borrows is particularly negative on the outlook for developed market government bonds, noting that investors in the asset class have experienced a ‘thirty-five year bull market’, in those assets. He believes that the sell-off in government bonds which began last Autumn will continue.
The one area of the fixed income market on which he is keen is high yield bonds. These are debt issued by companies with a credit rating of lower than BBB. The current economic conditions may favour investments in this asset class, as improved economic conditions mean that the companies have a greater capacity to repay the debt, while higher inflation makes the higher income paid by these bonds more attractive to investors.
The fund manager added that he prefers to invest in bonds that are ‘short duration’, that means bonds which have a short time until they mature, and investors get their capital returned. Borrows remarked that at current levels, ‘investors are not being paid’ to take the risk of owning bonds that have a longer date until maturity.
Read more: Top investor: Why I’m buying UK government bonds right now
With those considerations in mind, Borrows has avoided investing in strategic bond funds, as he takes the view that the managers of such vehicles tend to invest in many different parts of the market, while he prefers to focus on high yield bonds at this time.
This has led him to invest in the Royal London Short Dated Global High Yield Bond fund. The £543 million fund has a yield of more than 5 per cent. Borrows commented that while liquidity is a concern for many in the bond market, all of the assets in this fund will mature within 12-18 months with the consequence that this fund is unlikely to be plagued by some of the volatility that has visited other bond funds as a result of the sell-off.
The Seneca Income and Growth Trust has returned 95 per cent over the past five years.