Paul Flood, who runs the £150m Newton Multi-asset Diversified Return fund, said he has been taking an “aggressive position against the bond market” as he searches for returns.
Mr Flood said the traditional “rules” for an absolute return investor do not apply in a world where markets have been “distorted” by central bank bond buying and the policy known as quantitative easing.
He said one of the “rules” of multi-asset investing is that bonds offer diversification away from equity markets.
Mr Flood said “all financial and investment theory was written for an environment when monetary policy was not unconventional.”
This has led him to focus on what he calls “real assets” in an effort to achieve diversification away from equities.
He said investors want returns that are greater than inflation, which in the current climate means returns of more than 3 or 4 per cent.
He said government bonds offer a yield of closer to 1 per cent, and represent the market taking a view that the global economy will perform poorly.
Mr Flood said he has replaced much of his bond market exposure with investments in renewable energy and infrastructure investment trusts.
He said these assets are uncorrelated with equities as they are less economically sensitive.
In addition, he said the yields are much greater than those available on government bonds, yet the income is also government backed.
Many of the investment trusts which own real assets trade at substantial premiums to their net asset value.
But Mr Flood said he is unconcerned by this.
He said: “With a conventional trust, that invests in FTSE 100 shares where there is daily pricing of the underlying investment, the level of the premium matters, but for us, with assets that are not traded daily, it is less important.
"Banks often trade at twice their book value, the book value is the net asset value, and people are quite happy to buy those”
He said if bond yields get to a level of 5 or 6 per cent, “then my job will be to sell those assets and buy bonds, but we are a long way from that.”
He is invested in Greencoat UK Wind and the Renewables Infrastructure Group. .
Francis Klonowski, who runs Klonoski and Co, a financial planning firm in Leeds, said he made a decision three or four years ago to not invest in absolute return funds as he considers them complicated to understand, and complicated to explain to clients.
david.thorpe@ft.com
