Kames Capital’s Stephen Jones “changes his mind”
Following an extreme change in the outlook for global growth through 2011, Stephen Jones, joint head of fixed income at Kames Capital, says he has changed his mind about the impact of future inflation.
The change in the outlook for global economies and markets in the period January to September 2011 has been extreme. We began the year thinking that growth would be robust, that economies could weather the withdrawal of the extraordinary stimulus applied by governments and central banks, and that a slow but steady path back to growth could be achieved. Within the Kames Inflation Linked Fund we believed that this was inherently inflationary and began the year with asset allocation that reflected this: long index-linked government bonds in the UK and overseas, countering the inflationary erosion of savings with exposure to credit, taking exposure to commodities as well as dividend paying equities, and being no more than benchmark duration. Indeed, on occasion the Fund was tactically short.
Over the months from Easter to Autumn, we’ve since responded in the Kames Inflation Linked Fund with significant asset allocation shifts and tactical positioning. We’ve moved the Fund long duration, even when compared to the 19 years embedded in the Fund’s benchmark. Perhaps more importantly is the Fund’s underweight in real yield index-linked duration and our preference for conventional, long-dated interest rate exposure in the UK, Europe and the US. These positions have been implemented in physical assets, in futures and options markets and with interest rate swaps.
In summary, the Fund has been dynamic in its approach to a rapidly changing outlook. Thinking “inflation” in the investment approach includes reacting and positioning for deflation should that become an issue. This has been the case over the short term and has been to the Fund’s overall benefit. However, we remain very concerned that deflationary themes are going to be temporary. The “way out” of this current slow period of growth, this poor employment outlook and this turmoil in Europe, is through further massive stimulus in the form of quantitative easing, interest rate cuts in Europe, and erosion of government debt burdens through tolerance of inflation. Policy options are, as the summer storms evolved into equinoctial gales, limited and all point toward options that make flexible inflation-linked investment a necessary part of any investment approach.
Stephen Jones is joint head of fixed income at Kames Capital.