Old Mutual bond manager cuts cash and gilts
The manager increased her exposure to cash bonds in January, raising the number of holdings in the £498.7m fund from 104 at the end of 2011 to 126 by January 31.
Johnson has gradually added risk to the portfolio after being “very defensively positioned” over the latter part of 2011. Improving American economic data and the European Central Bank’s long-term refinancing operation were the main catalysts for this move.
“There was enough to make us think that the market has oversold and we want some exposure,” she says.
“We had 20% in gilts and cash but that’s now been reduced to about 5%. We’ve invested back into cash bonds. We’ve closed our short CDS [credit default swap] and replaced it with a long CDS position.”
The fund has just 0.2% in cash as of January 31.
The portfolio allocation to banks has increased during the changes, moving from an underweight to a neutral position. Johnson has invested in some French banks, through buying bullet bonds rather than callables.
However, the manager has tried to stay away from the “misery and pain” found in Europe. She has bought bonds issued by Ford, GM and Chrysler - the three big American automakers - and owns Jaguar bonds for access to consumer demand in emerging markets.
“We like high yield because we think it’s very cheap relative to where the default rates are likely to go,” says Johnson.
“High yield is a nice way of getting that extra return while staying outside of the volatility in Europe.”
Johnson has also taken about 1.5 years off the fund’s duration since the last part of 2011.
“There was very strong run-up in the long end of the gilt market going into the end of last year,” she says. “We were happy to participate while it was going on, but fundamentally we didn’t really believe in it.”
The OM Corporate Bond fund returned 4.3% in the year to January 31, against the peer group’s 7.4%. It has outperformed over three years, returning 73% against 39.2%.