LVAM's Wright: Duration not best way to play rate hikes

Reducing average duration is not the best way to benefit from rising interest rate rises, according to LVAM’s Michael Wright, who prefers to buy longer-dated gilts and cash.

The head of fixed interest, who is responsible for mandates with assets under management of around £5bn, warns cutting duration may be sacrificing yield.

"We are looking at a normalisation of interest rate policy over the next few years and, therefore, a normalisation of the yield curve, or, in other words, it will flatten.

"We believe long-dated gilt yields will stay at around the same levels they are now, 4.5%, held up by pension fund and liability driven demand.

"Having a very short duration position is not what you want to do, you will give up a lot of the yield."

Instead, managers should "position selectively on the gilt curve."

Recently, Investment Week reported bond managers from Old Mutual, Barings and Fidelity reducing duration in order to benefit from rising interest rates.

However, Wright says, his barbell approach of holding longer-dated gilt yields, cash and has a small position in "ultra" short-dated gilts, will serve investors better. He sold out of five-year bonds to make the purchases.

"This would change if we felt inflation was going to be more of a long-term problem but we do not believe it is at the moment."

He anticipates interest rates are likely to be hiked in May by 25 basis points, with a further 25bp rise later in the year.