Bloomberg News

M&G Welcomes Volatility as Bank of England Boosts Stimulus

October 06, 2011

(Updates with Bank of England’s rates and bond-purchase decision in second paragraph.)

Oct. 6 (Bloomberg) -- For David Lloyd, the head of institutional portfolio management at M&G Investments, price swings from another round of Bank of England bond purchases are more important than any economic impact such a move may have.

The central bank today reactivated its quantitative-easing program to boost the economy amid signs the recovery is sputtering. It also held its key interest rate at a record low 0.5 percent. Lloyd and his team use a so-called relative-value strategy to manage 20 billion ($31 billion) pounds of the fund’s 290 billion pounds. This means they thrive on volatility as they make profit from identifying price anomalies, then betting that the mispricing will return to historical norms.

“The mechanism of massive issuance, followed by the Bank of England stepping in a couple of days later to buy, meant individual stock volatility was extreme,” Lloyd said, referring to the stimulus program started in March 2009. “That’s exploitable as that volatility is entirely mean-reverting. There is no reason why two gilts next to each other on the list should have yields meaningfully different from one another.”

Policy makers increased the Bank of England’s bond purchase program by 75 billion pounds to 275 billion pounds, saying in a statement that slowing global growth and the turmoil in Europe “threaten the U.K. recovery.” The pound slumped against the euro and dollar, and U.K. government bonds rose, sending the 30- year gilt yield to a record low.

‘Pub Conversations’

U.K. economic growth slowed more than initially estimated in the second quarter as consumer spending fell the most in more than two years, adding to pressure on the central bank to restart its stimulus program.

Gross domestic product rose 0.1 percent from the first quarter instead of the 0.2 percent previously published, the Office for National Statistics said yesterday in London. Consumer spending plunged 0.8 percent, the steepest decline since the first quarter of 2009.

“When the next round of QE comes in, we won’t concern ourselves with the uncertain impact of that on the overall level of yields and the effect on the economy,” Lloyd said before the announcement of today’s central bank decision. “All we know is that the volatility it creates can be exploited profitably.”

The fund manager, who says his life-long passion is for “absurdly large” motorcycles, does not base his investments on forecasts or fundamental views, saying he limits discussion of those topics to “pub conversations.”

“We can all come up with convincingly clear views of what the future will look like over a beer or two, but don’t take that kind of crystal-balling to work,” he said. “Economic, political and market volatility is currently so extreme that if you base your investment strategy on claims that you can see the future, you might end up being carried out if you are wrong.”

--Editors: Mark McCord, Peter Branton

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;

To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net;


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