- Mike Riddell due to take over at Allianz unit next month
- He favors basing decisions on global rather than U.K. economy
When Allianz Global Investors’s new fund manager for U.K. government bonds decides what to buy, Britain’s economy isn’t even one of his top-three considerations.
Mike Riddell, who joined AGI last week from M&G Group Plc, says gilts tend to be influenced by the global rather than the domestic economy, even though the U.K. is home to one of the world’s biggest financial centers.
With the next interest-rate increase from the Bank of England seen as still some way off, and the minutes of its latest meeting this week citing slow inflation, he said the Federal Reserve is proving more of a driver.
At the end of November, Riddell will take over management of the 965 million-pound ($1.5 billion) Allianz Gilt Yield Fund and the 70 million-pound Allianz Sterling Total Return Fund, both of which are being moved from sister company Pacific Investment Management Co.
Drawing on a lesson from the school classroom that business cycles tend to last eight to 10 years, Riddell said, “we’re probably a lot closer to the next slowdown than we are to the last one, so that’s always at the back of my mind.”
So what matters most to him?
The correlation between 10-year gilts and U.S. Treasuries has been very strong over the past five years and so the Fed is “the most important factor” for U.K. bonds, Riddell said. That’s particularly true since, by holding interest rates last month, the U.S. central bank prompted traders to push out bets on tighter BOE policy too.
When the European Central Bank began an unprecedented 1.1 trillion-euro ($1.2 trillion) stimulus plan earlier this year, German bunds rallied. That drove 10-year yields to as low as 0.05 percent in April, and even after a second-quarter selloff they’re only about 0.6 percent.
Gilts now yield the most over their German peers since August, which Riddell said is luring buyers. The U.K.’s benchmark 10-year yield climbed three basis points Friday to 1.84 percent.
While the U.K. doesn’t have much direct exposure to emerging markets, the BOE can’t raise rates until global growth improves, said Riddell.
“What’s been happening in Asia, and China in particular -- this is globally deflationary,” Riddell said, pointing to a drop in factory-gate prices in the world’s second-largest economy as a structural change.
Inflation has slowed globally and “central banks in the developed world are still looking at this as temporary,” he said.
“My question is, what if it’s not temporary?” he said. “It seems to me it’s a pretty long-term structural dynamic. If it’s not a one-off, U.K. inflation right now is zero. Will the U.K. be hiking rates when inflation is close to zero? I don’t think so.’
But this isn’t all bad news, he said, because “inflation is the enemy of the bond investor.”
Where to Invest?
Riddell favors 10- to 30-year gilts. In both index-linked and conventional debt, 30 years “are the most interesting, due to dislocation around supply events, and there’s been a lot recently which has cheapened that part of the curve.”
While U.K. politics are a risk, with a referendum on the nation’s membership of the European Union due before the end of 2017, Britain’s haven status in financial markets isn’t in question, Riddell said. And so Brexit -- the country quitting the bloc -- isn’t on his mind just yet.
At M&G, where he worked for 12 years, Riddell oversaw three funds totaling $3.5 billion, according to data compiled by Bloomberg.
AGI, part of Allianz SE, manages about 446 billion euros, of which 199 billion euros is in fixed income.