McQuaker (pictured) head of multi-asset at Henderson Global Investors, says mass intervention from the world’s central banks combined with historically low interest rates has badly undermined the case for fixed interest in a balanced portfolio. Although he does not expect any real growth from the sector, McQuaker says that commercial property, generating a healthy and predictable yield, is one of the best options for investors to create a more balanced portfolio.
"For the first time in my career running funds we have been putting commercial property into the portfolios," he said.
"Looking at the yields on commercial property, they are reasonably attractive compared with their history. Also, there isn’t the same crowding in property as there is in bonds."
"If something bad were to happen, all that money that has piled into fixed interest will have to come out."
"It was a similar story with property in 2008 and 2009, however we have seen that investors have sold out of property and haven’t gone back."
FE Trustnet recently revealed that FE Alpha Managers John Chatfeild-Roberts, Peter Lawery and Algy Smith-Maxwell are adding to their property exposure in the Jupiter Merlin range.
McQuaker says that he is using the five crown-rated Henderson UK Property fund for his exposure.
"It is quite a large fund that is conservatively managed and the quality of the underlying leases is good," he said.
"The fund has a decent yield of 4.5 per cent and we are not being too greedy on the rate of return from it."
"With a yield of 4.5 per cent, and say you added just 50 basis points on top of that; I think 5 per cent return each year isn’t bad at all."
"Also, the fund gives us a bit of inflation protection with the leases."
The £833.5m Henderson UK Property fund is co-managed by Marcus Langlands-Pearse and Ainslie McLennan.
It holds 23.7 per cent in cash and 3.3 per cent in property shares, with the remainder in physical property.
Over 10 years the fund has returned 33.12 per cent while the IMA Property sector has made 86.87 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
However, Henderson wished to point out that the IMA Property sector includes funds that buy the shares of property companies and those that invest in listed property alone – such as Henderson UK Property – and that performance comparisons between the two can be misleading.
The fund has an OCF of 1.84 per cent and requires a minimum investment of £1,000.
Despite his move towards property, McQuaker says investors cannot completely ignore fixed income.
He says that although investors are naturally wary of equities, finding bonds that offer sufficient reward for the risks they entail is becoming increasingly difficult.
"I get asked the question a lot from my clients saying, 'what are you going to do with your bond exposure?'"
"Interest rates are stunningly low and all across fixed income assets, government bonds, corporate bonds and high yield – almost everything in the bond market has yields at rock-bottom levels," McQuaker said.
"It is presenting a real problem, especially for those who don’t want to have to take equity risk but still want to see a return on their investment."
"This is certainly the case if interest rates were to rise, because investors are going to be losing money," he added.
To satisfy the needs of investors who still want exposure to fixed income, McQuaker is using less conventional methods to maintain a balanced portfolio.
"We have gone for a three-pronged strategy," he said. "Firstly, we are wary of having too much exposure to duration."
"The risks surrounding duration at the moment are systemic due to such low levels of interest rates."
"This is especially the case in sovereigns, where I just don’t see how government bonds stack up as an investment in the current environment."
"Therefore we are holding low-duration bonds," he said.
"The next theme we are playing is holding US dollar-dominated bonds. We believe that the dollar could be coming back into a stronger phase as we feel the US is the only developed economy that is healing."
"By holding dollar-dominated bonds, we think we can make money on the currency – not necessarily on the underlying bond," he added.
McQuaker says that using the most flexible strategic bond managers is key to keeping a relatively safe approach to fixed income.
"The next step is to use heavily managed strategic bond funds with managers that have real skill in the asset class," he said.
Chris Forgan, multi-asset manager at Henderson, says the team uses both in-house and external managers for its strategic bond exposure.
"The flexible bond funds we use are John Patullo and Jenna Barnard's Henderson Strategic Bond fund, Jupiter Strategic Bond and also Stewart Cowley for more global exposure," he said.
FE Alpha Manager Cowley has run the Old Mutual Global Strategic Bond fund since June 2009. Since this time it has returned 41.64 per cent while the IMA Global Bond sector has made 39.58 per cent.
Performance of fund vs sector since June 2009
Source: FE Analytics
The fund has a yield of 1.9 per cent and its largest weighting is to AAA rated credit, making up 58.7 per cent of the £903m fund.
The fund has an ongoing charges figure of 1.12 per cent and requires a minimum investment of £1,000.
Forgan added: "All three funds have a diversified breadth of underlying holdings and have used their flexibility well in the current environment."
James de Bunsen, who is also a multi-asset manager at Henderson, says that investors should make sure their strategic bond managers have a truly diverse portfolio and are not falling into the high yield trap.
"With our strategic bond funds, we want ones that are not too reliant on high yield, which make up a lot of fund’s AUM in the sector."
FE Alpha Manager Richard Hodges recently told FE Trustnet that he was concerned about the lack of genuine strategic bonds available because they tend to focus on just one area of fixed income, such as high yield.
McQuaker heads up the Henderson Multi Manager range as well as the recently launched Henderson Core Income portfolios.
He has been running multi-asset funds in the IMA universe since July 2005. Over this time he has returned 60.51 per cent, while his peer group composite has returned 36.28 per cent.