Old Mutual's Johnson to introduce more risk
Old Mutual fund manager Christine Johnson has started to introduce more risk into the £473.1m Old Mutual Corporate Bond fund.
In recent months the manager has built on the portfolio’s defensive positioning by increasing its exposure to gilts, long-dated gilts and futures, while being “absolutely scrupulous” about the cash bonds it owns.
Her moves towards a greater risk position were prompted by the realisation that the “sugar rush” of the European Central Bank’s long-term refinancing operation would quickly fade if worries such as those over the health of the Spanish banking system were not permanently banished. (article continues below)
In the past five weeks, however, Johnson has started to take small to modest positions in more riskseeking areas of the market.
She has added long positions by creating a synthetic long in the Markit Itraxx European Senior Financials Index, as well as gaining exposure to the Markit Itraxx European Subordinate Financials Index and the Markit CDX North American High Yield Index.
The manager says the risk priced into the European senior financials index suggests that one in five banks will default and losses will be taken at the senior part of the capital structure, which she considers disproportionate to the reality on the ground.
“We think that’s absolutely ridiculous,” she says.
“From the amount of support that’s been thrown not just at banks directly but to support the system as a whole - from liquidity to sovereign support to words that have come out of regulators - we just don’t think that’s remotely plausible.”
The Old Mutual Corporate Bond fund has also started to add more cash bonds to its portfolio and bought “a fair bit of paper” in the past two weeks. Names found in the fund’s top 10 include the German government-owned development bank KfW, the natural gas company BG Group and entertainment business Time Warner Cable.
Johnson adds: “The other side of this is you start letting some bits of duration go because the gilt market has performed extremely strongly. That’s exactly what we wanted it to do, but nevertheless any sort of fundamental value is long gone in terms of the gilt market. So we’re starting to tilt the portfolio back to being a little more risk-seeking.”
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