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The City Financial Strategic Gilt Fund was named the Number 2 fund in the 23 July 2009 edition of Professional Adviser’s Hot 100. This accolade recognises the fund manager Ian Williams’ consistent positive performance over a rolling one-year period. What follows are some of Ian’s recent thoughts which I hope might be of use with your clients.” – Andrew Williams, Chief Executive, City Financial

For the balance of the summer and into Q4 we believe the primary driver behind gilt market behaviour will be equity markets. We believe the FTSE 100 Index is now topping out on a medium-term view and that cash will be taken out of equities and will flow into gilts. In our view it is unlikely that the unfolding economic data will be able to support equities valuations at current levels. We do not anticipate a collapse to March’s lows of 3,500; however, a downward revision to 4,000 – 4,100 is at least a strong possibility.

The initial introduction of quantitative easing in early-March coincided with the bottom of the equity markets. It is therefore no surprise to us that the recent suspension of the same policy may well coincide with their top.

Six months ago, the consensus amongst most gilt market participants was that quantitative easing would push yields down, some arguing as low as 2.5% on 10-year gilts. We contended at that time that this was unrealistic and that quantitative easing would prevent yields from rising too high, rather than pushing them down. And as it happens, after four months of active easing, yields have remained relatively stable. The potential suspension of the easing program, however, could serve to shift the balance back towards deflationary rather than inflationary trades. This was very much a core factor in our decision earlier in July to switch from an overweight position in index-linked gilts to an equal but opposite bias for conventional gilts.

As a gilt fund aiming to generate a total return across a wide array of market conditions we have a number of tools at our disposal. The ability to write options, access index-linked gilts, modify the duration of the portfolio, and take cash positions for short-periods of time, are all options we actively consider, as we keep a close watch on the preservation of client capital.

The City Financial Strategic Gilt Fund continues to be number one in the IMA UK Gilt sector 2009 year-to-date, leading the number two Royal London UK Government Bond fund by 2.85%, and the FTSE Actuaries British Government All Stocks Index by 4.06%. The Fund is up + 17.16% since launch on 8 December 2006*.

– Ian Williams

*Source: Lipper, 01.01.09 – 27.07.09, 08.12.06 – 27.07.09.