Skip to main content

Miles Ashworth, Head of Private Wealth at Creechurch Capital, the Douglas-based boutique discretionary fund management firm, gives his expert commentary.

If you look at bond markets in the UK and USA, both are hinting that recession risk is rising. A lot of attention has been drawn to inversion of the yield curve and historically this has been a pretty reliable leading indicator for recession risk. As we’ve highlighted previously, maybe this time is different, due to distortions from quantitative easing and super low or even negative interest rates, but it’s certainly prudent to adopt more of a defensive formation at this juncture.

The problem is you don’t get paid for holding exposure to low risk or safe-haven assets, without becoming overly reliant on the greater fool theory or some price insensitive buyer or pension fund. Earlier this week, the German government issued a €820million 30-year zero coupon bond on a negative annual yield of 0.11%. As the future is inherently uncertain, investing is often broken down into probability distributions or scenario analysis, but it’s very difficult to imagine a scenario where buy-and-hold investors can get a good outcome from this allocation. There is also chatter that some of the big sovereign nations are looking to issue ultra-long dated 50-year or 100-year bonds. If the German example is anything to go by investors will be rushing through the turnstiles to give their money away at some ludicrously low or possibly even no coupon.

If textbook economics don’t work – and maybe there is a wider argument that economics has failed more generally as a discipline – there is an even stronger rationale to adopt the Roman ‘testudo’ (a strong defensive formation using shields and resembling a tortoise). In the current environment asset allocators have become obsessed with benchmarks – enter the rise of cheap passive Exchange-Traded Funds (ETFs) and the ultimate momentum trade. Not to give away any trade secrets, but certain parts of the ETF universe are a ticking time bomb and there will be a serious liquidity event at some point in the future. We have seen recent examples in the active fund space and that is the canary in the coal mine.

For us, like the Romans, defence means discipline and a strong strategy. These defensive characteristics come from robust portfolio construction techniques and understanding of multiperiod correlation analysis, not buying shiny yellow bricks (gold), sovereign bonds on anaemic yields or illiquid investments masquerading as daily dealing ETFs.

For more information about Creechurch Capital go to, email, or phone +44 (0)1624 653800.