How to play fixed income in 2012: selectors reveal their approaches

Citywire Global delves into the fund selector community to find how they are approaching fixed income in 2012 at a time when attitudes to what is risk-free and what is not are changing rapidly.

Robin Hamro-Drotz, Ålandsbanken Asset Management (Finland)

It’s true that many things they taught us at university about the fixed income market are becoming questionable. The risk-free rate of sovereigns seems to be turning into rate-free risk. It is now more important than ever to know precisely what mandate the fixed income manager has and how flexible he or she can be.

The allocation between sovereigns and credit is crucial at this moment in time. Hence, special consideration should be given if this decision is something you want to outsource or do yourself. We have been using Pictet EUR Corporate Bonds ex Financial in our fixed income allocation.

Domenico Fazio, Banca Arner (Italy)

The European debt crisis has changed investors’ attitude toward fixed income investments. Financial markets entered in the year 2011 with the conviction of being close to a solution for the European sovereign issues, but the year ended with the certainty that the concept of ‘risk free asset’ is no longer valid.

The best way to deal with this uncertainty is to increase attention on the credit quality of the issuer and investors will recognise that short-term bonds, issued by firms with solid balance sheets and growth prospects, could be the new risk-free investment.

The reason lies in the fact that they are in better shape than government ones in terms of debt level and free cash flow. An example of this strategy in the European credit space is Muzinich Enhanced Yield; the fund’s rigorous bottom-up approach enables it to extract the pure credit value without the interest rate volatility.

Another good fixed income investment that could insulate from developed market woes is emerging market bonds, because they are much more solid than developed market peers in terms of debt ratios and fiscal deficits. The strength of their public finances will be rewarded with more inflows in the years ahead.

A conservative approach to those bonds counters the risk of too much volatility, especially from emerging market currencies. The ACPI Emerging Fixed Income fund takes advantage of this scenario by investing flexibly in both local and hard currency bonds, with an absolute return approach and an emphasis on capital preservation.

Enrico Zadra, Banca Popolare di Sondrio (Switzerland)

Corporate bonds cannot replace government bonds because the latter have specific features that the former cannot offer. We acknowledge that credit risks are surfacing within governments and that growth prospects and public finances are always more important in determining the yields of these bonds.

To cope with these problems (or maybe opportunities) we rely, at least partly, on different benchmarks for fixed income portfolios, like the ones based on GDP weights. This approach enables us to allocate assets more sensibly and better control credit risk within governments. PIMCO is one of the asset managers that is using this approach and we are invested in PIMCO GIS - Global Advantage fund.

Mohammed Sibda, Momentum Manager of Managers (South Africa)

Thankfully South Africa is not faced with the same fiscal and political issues that many developed countries are. Our government guaranteed bonds like many other emerging countries have benefited from the uncertainty and confusion surrounding the euro as well as from the search for yield among international managers. To emphasise this point, our local government long bond yields reached historical lows in 2011.

We are not concerned about our government’s ability to repay debt but we are wary about the current yields and whether they are sustainable given that foreigners own a huge chunk of our bond market. Our bond managers are therefore finding more opportunities in corporate credit and inflation-linked bonds.

In order to limit possible capital losses we have shifted to flexible fixed interest strategies, allowing our managers greater discretion to select between cash, bonds and other fixed income securities.

François Bertrand, Feedback Gestion (Luxembourg)

Welcome to 2012… the only certainty this year will be uncertainty.  The outlook is clouded with two threats: 1) The evolving situation surrounding the sovereign crisis; 2) Banks burdened by a developing regulatory regime (Basel 3 and Solvency 2) and not increasing credit to the economy.

Our credit strategy is unaltered. Looking at the risk/reward profile, credit remains attractive on a mid-term horizon. We remain overweight in investment grade core, we add through ‘cheap’ new issues and go for front-end high yield opportunities where 5-7% yields are on offer from low-BB names. Managers we are backing include Richard Woolnough on the M&G Optimal Income fund.

This article was originally published in the February 2012 edition of Citywire Global.