Market nerves prompt Harries to move into AR bonds

Swip's head of multi-manager Mark Harries has moved his portfolios towards absolute return bond funds as investors become jittery on some parts of the fixed income market.

"We have been nervous on the bond market since last autumn and have moved to absolute return bonds. In this panic, there has been a move up the quality spectrum as investors look for a safe haven, but it seems to be a short-term phenomenon," he says.

"We hold Bill Gross at PIMCO, Richard Woolnough at M&G, and Julius Baer because they can be more flexible in bond markets."

On equities, Harries says he has been generally cautious since the start of the year, although this reticence was slightly premature.

"We entered the year cautious and too early," he says.

"We raised cash in February as we were concerned the market continuing to rally in January was an extension of last year in terms of what was driving markets. Then the market sold off in early February, and the market climbed a wall of worry. We put cash to work, buying some iShares on the FTSE 250. Having seen the market rally to 5,800, the sell-off seems a bit overdone."

He favours absolute return equity funds as well as bond funds, owning listed fund of hedge funds and retail portfolios such as Mark Lyttleton's BlackRock UK Absolute Alpha.

"If the market is volatile you need managers that will protect on the downside - hedge funds were down 1% when markets were down 6.5%," he says.

Harries draws a parallel between the present market environment and 2003-2004 in terms of growth conditions.

"This year will possibly be similar to 2004," he says.

"The most comparable time, because equities were up 40% to 50% last year, was 2003 when you had a rally starting with the Iraq war.

"Then in 2004, you had similar macro conditions to what we have today, such as concerns over whether the Fed would raise rates, whether growth was sustainable, and how strong it would be.

"At these times you tend to get sector rotation - cyclicals lead the way in the first nine months, then defensives perform well.

"We have looked at the history, and we are working on the basis that we would do well in most market outcomes.

"The only environment we could not cater for is if cyclical companies and more aggressive funds continue to rally this year. This is a story we could not participate in," he adds.