The manager of Aviva's £1.6bn Corporate Bond fund has been reducing risk in the portfolio in the view bond markets will be affected by ongoing macroeconomic uncertainty.
Chris Higham has been taking a similar stance across his other portfolios, the £43m High Yield fund and the £85m Strategic Bond fund.
"We have been reducing risk in the rally of the last few weeks," he says. "Government bonds and high yield have been phenomenally strong year to date. Investment grade corporate bonds are up 9.5% year to date, while strategic bonds are up 10% and high yield 10.5% to 11%.
"This year is about trading the ranges. Credit markets will remain volatile over concerns about US growth, the housing market, and sovereign risk. There are enough things out there that will resurface at some point - we are not out of the woods."
Higham says he has been selectively cutting risk assets within the fund, taking the cash levels in all three funds to their maximum of 10% by moving out of credits and into short-dated government bonds. He has also reduced interest rate and credit risk across the fund range.
"My view on interest rate risk has been more constructive than some of my peers, and this has driven performance year to date. We have had duration risk, and we got the call right so we have been happy to take risk off the table.
"We expect a robust supply pipeline starting in September so we will probably spend the cash we have raised then. We will have the firepower to take advantage of opportunities."
Financials is a key sector in which Higham has cut holdings following a run of strong performance.
"The news in July from the financial sector was good," he says. "There were strong results from the banks. Following the stress tests and Basel III, combined with the return of risk appetite, financials did very well, so this is one area where we have reduced risk more than others. However, we don't want to reduce it too much as yields are double those of other sectors.
"We don't see a lot of value in other areas such as utilities, telecoms, and tobacco, so we have reduced names within those sectors as well."
On a medium- to long-term view, Higham says fixed income will be a good place to be, as he expects interest rates to stay low, while yields of 5% to 8% will prove attractive.
