Kames Capital, whose inflation-linked bond fund is the best-performer in the U.K. over the past 12 months, is counting on more asset purchases by central banks this year to boost returns further.
The Edinburgh-based money management firm, which has about 27 billion pounds ($42 billion) of fixed income assets, bought more U.K. gilts and U.S. Treasuries on bets the Bank of England and Federal Reserve will resume so-called quantitative easing to lower borrowing costs and boost economic growth.
Kames, a unit of Dutch insurer Aegon NV, prefers markets with “strong central banks who are prepared to support what are low, but necessary, yields to foster growth,” Stephen Jones, co-head of fixed income, said in an interview at his office in the Scottish capital on May 21. “Central banks along with governments want to take no risks in re-establishing growth.”
Britain needs more quantitative easing and should also consider budget stimulus including temporary tax cuts, the International Monetary Fund said yesterday. A report the same day showed inflation in the country slowed more than economists predicted last month, leaving more room for the Bank of England to loosen monetary policy for an economy that slipped into its first double-dip recession since 1975.
Governor Mervyn King has “more tools” to stimulate growth and the IMF has discussed using them, Managing Director Christine Lagarde said at a press conference with U.K. Chancellor of the Exchequer George Osborne in London yesterday.
The Bank of England held its bond-purchase target at 325 billion pounds this month and kept its key interest rate at a record-low 0.5 percent.
The Monetary Policy Committee voted 8-1 to keep the asset-purchase program unchanged at the May 9-10 meeting, minutes released in London today showed. For some members, the decision was “finely balanced” and officials could conduct further stimulus in the future if the outlook warranted it, they said.
“We are believers in the view that quantitative easing is paused rather than ended,” Jones, 44, said a day earlier. “We’ve been happy to be well exposed to U.K. government bonds. Certainly from March onwards, we’ve been happy adders of them.”
The Kames Inflation Linked Fund, which started in July 2010, gained 21.2 percent in the year to May 21, ranking first among 22 competitors, according to data from research firm Morningstar Inc. Since the end of last year, it has risen 2 percent, slipping to fourth out of 24 peers, the figures show.
Kames Capital bought more gilts because gains that pushed 10-year yields to a record low and delivered the third-highest returns in the world in the past year will be sustained as the Bank of England revives purchases. Kames is also buying longer-dated Treasuries as 30-year yields “are very good value” because the Fed also likely to ease policy, Jones said.
Ten-year gilt yields dropped five basis points, or 0.05 percentage point, to 1.82 percent, after being as low at 1.81 percent on May 18. The yield on the U.S. Treasury 30-year bond fell three basis points to 2.84 percent.
U.K. gilt yields slumped to records this year as inflation slowed from as high as 5.2 percent last year to 3 percent in April, moving within the government’s range for the first time since February 2010.
Search for Havens
British and U.S. securities also jumped as a worsening of the European debt crisis fuelled demand for havens. Investors bought securities with 10-year yields below 2 percent, while Spain’s yields jumped to more than 6 percent.
“Greed has not overcome fear on that one,” Jones said of Spain. “We are cautious and don’t see much value in Europe.”
U.K. government bonds have returned 16 percent in the past year, with only Germany and Ireland with bigger gains among 26 markets in indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries made 9 percent and Germany jumped 17 percent, the gauges show.
The Fed’s $400 billion swap of short-term debt for longer-term securities in a program known as Operation Twist, is due to end next month and Chairman Ben S. Bernanke said April 25 that the Fed remains “prepared to do more as needed” to support growth and employment. The U.S. central bank undertook $2.3 trillion of debt purchases in two rounds of stimulus between December 2008 and June 2011.
“We think if further quantitative easing occurs, it could well be in the form of long-dated purchases,” said Jones, who’s been at Kames Capital since 2002. “We do continue to like the long end of the Treasury market.”