Jane (pictured) is starting to trim the equities in his portfolio after strong gains, but says he cannot see any good reason to reinvest in bonds. His cash weighting is currently at 15.5 per cent. The manager says few bond issues are worth holding at the moment, adding that the idea that the asset class provides diversification value is highly dubious.
"I really can’t get excited about bond yields, we can only get yields of 3 per cent," he said. "We have made some good returns on Spanish, Irish and Italian bonds, but you have to work very hard to find this and generate a yield worth the risk."
"The yield on its own, once you have bought it, paid dealing costs and so on, it seems like a lot of effort, too much for the yield. It’s a lot of work for a lot of risk and downside potential."
Jane adds that investors are wrong to think of bonds as a low-risk option – they are no less risky than equities at the current time.
Liquidity risk – the risk of not being able to sell when and at the price you want, is often underappreciated, he says.
"With bonds, there are a huge number and you can only buy when you can find a seller and sell when you can find a buyer," he said.
"So when something comes along, we might get involved but it’s not happening very often with yields down where they are. I am not going to take liquidity risk for a yield of 3 per cent."
"We can buy credit risk but it’s very similar to equity risk in price so we don’t like that, so then what are we left with?"
Jane says that he has added a few floating rate bonds to his portfolio, but there are risks to these investments too, meaning he is very selective.
"Floating rate loans have just liquidity and credit risk, so you get that yield but you mustn’t be too naïve: you are getting liquidity risk, things are always easier to buy than sell."
"Like many things in the alternative space, we own it but I cannot bring myself to get into it with too much conviction with the market being where it is."
"Many people have been hurt in the past and I don’t want to be one of the people hurt in the future."
Jane was formerly the head of equities at M&G and now runs the £40.3m TM Darwin Multi Asset fund, which sits in the IMA Mixed Investment 20%-60% Shares sector.
Data from FE Analytics shows that it has returned 16.12 per cent since launch in June 2011, against 14.35 per cent from the average fund in the sector.
Performance of fund vs sector since launch
Source: FE Analytics
The manager has just 21.3 per cent in fixed interest but 55.6 per cent in equities. His weighting to shares has come down since he started selling big gainers such as ITV, which he bought at £1 and sold at around £1.90.
He bought US company Tesla at £1.30 and has been selling at £1.60 to £1.70. On the equity side he is reinvesting in less expensive stocks in more defensive sectors that haven’t kept up with the market over the past year.
This chimes with comments carried by FE Trustnet yesterday from Tim Gregory, chief investment officer at Psigma, who warned that the rally in cyclicals may have already run its course.
Much of the money is still sitting in cash, however, and the manager says he expects to keep a relatively high weighting to the asset class for some time.
He is unconvinced by the argument that the diversification benefits provided by bonds make it worth taking the capital loss.
"Government bonds haven’t behaved as a risk-off asset: bonds and equities have been positively correlated since the 'taper tantrum'," he added.
"The concept that equities and bonds are a natural pair in a portfolio has only been true for 50 per cent of historic periods, so half the time it’s right and half the time it’s wrong."
"Five to 10 years ago, people said they bought bonds because they add a yield to your portfolio, not because of correlation, they just said there was value in adding yield to your portfolio."
"We think the risk of holding assets irrespective of returns just makes no sense at all."
"At the end of QE, and there will be an end one day, you are just left with the yield, and the question is whether that’s enough."
There was a brief rally in bonds after the crisis over tapering passed, but Jane says investors are clutching at straws if they think this justifies their losses.
Performance of bonds and equities in 2013
Source: FE Analytics
"It was a very short rally and I am struggling to see the argument that holding an overvalued asset helps you."
Jane says that with regard to equity markets, he remains convinced that Europe and Japan are the places to be; he has trimmed his holdings in the UK and the US.
Japan looks good on a long-term basis, he says, and compares it to "the UK under Margaret Thatcher": a country undergoing essential reforms that could take some time to come to fruition.
The fund requires a minimum initial investment of £1,000 and has ongoing charges of 1.84 per cent.