What are the signals of the Atlantic House Dynamic Duration Fund telling us right now?

The strategy, which exists in fund format in our Dynamic Duration Fund, and as an allocation within our Balanced Return Fund, utilises three market signals which provide an estimation of the likelihood of future increases or decreases in UK and US interest rates and inflation. In turn, these systematically determine the fund's positioning as it pivots between bonds and/or inflation.

In this article, the fund managers provide an update the current indications of these signals and discuss when changes to the signals might be expected next.

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The Dynamic Duration allocation is currently neutral on bonds, which gives it a sensitivity to interest rates similar to that of a 10yr tracker, split 50:50 across UK Gilts and US Treasuries.

It is neutral because the three signals that aim to identify the current and prospective inflation environment are at 50% overall for both the UK and US. However, how they arrive at 50% is slightly different.

The value for each signal across the UK and US is shown below:

Signal	UK value	US value
1 - Inflation Trend	2/2	1/2
2 - Rates v Inflation	1/2	2/2
3 - Core Inflation	0/2	0/2

This gives 3/6 for both, which is neutral, and means the allocation has 50% exposure to bonds and 50% exposure to inflation.

The most recent change was late 2023. In December, the US exposure tilted from overweight bonds to neutral. This has been a welcome change as yields have increased since the beginning of the year, negatively impacting bonds.

The change was in Signal 1, where the downward trend in headline inflation had become less steep. We do not expect the US exposure to shift from neutral for some time without a significant change to the data and expectations in markets. There is a possibility that US core inflation will be below 3% this year, which will increase exposure to bonds through Signal 3, but this is more likely in 2025.

Changes in UK bond exposure are more likely this year, but not until Q3 2024. This would be a similar change as in the US at the end of last year, where the downward trend in headline inflation becomes less steep, meaning the exposure will change to be slightly underweight bonds in the UK. However, we notice that due to the increase in yields (and real yields), Signal 2 could turn overweight bonds in the UK if these increases persist, offsetting the potential change in Signal 1.

Overall, we do not expect a significant change in the strategy for some time, unless the economic landscape changes considerably.

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FOR PROFESSIONAL INVESTOR USE ONLY.

CAPITAL AT RISK. PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE.

Data as at 13-02-24