Stewart Cowley, Old Mutual Global Strategic Bond Fund

Solutions for the eurozone
• There is not enough money to bail out the whole eurozone
• No serious deal is yet in place to solve eurozone’s issues
• To reduce Greece’s debt problem markets need to agree
• either maturity extension on its bonds
• or creditors accept only 50% return of capital

Outlook for the UK
• Austerity measures are having little impact
• UK’s debt to GDP ratio for 2011 on course to be 8-10%, no change on 2010
• Market too focused on Europe to worry about UK’s problems yet

Impact on US pre and post-election
• Market concern with US has also been sidelined because of the crisis in Europe
• US borrowing of nearly $1trn a year - with no plans to reduce this – will remain
• US moving into pre-election period, talk about deficit reduction is going to be a political issue

Inflation outlook
• Inflation to remain as emerging markets compete with the West to purchase resources
• Western authorities cannot force inflation down – developed world is importing more than it is producing and its currencies are depreciating
• The 30-year bond bull market still has a way to run
• But conditions present a conflicting picture – high budget deficits, funding pressures, investors’ rewards not in line with levels of risk – bond yields ought to be rising

Strategy and portfolio construction
• Remains cautious having captured large declines in yields over the summer
• Has derisked the fund significantly because world is too speculative:
• Reduced duration from c8 to about c5 years; increased corporate exposure to c20%
• Reduced dollar exposure and stripped out euro and yen
• Cautious until Europe has a credible recovery plan. Once in place that will lead to
• Rising euro
• Fall in government bonds
• Rallies in corporate bonds, commodity currencies and equities
• Until then will maintain a low risk policy

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