European fixed income fund managers will continue to be wary of the periphery in 2011, says Standard & Poor’s Fund Services in its latest sector review…
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“Market moves in 2010 were all about the periphery,” said Kate Hollis, lead analyst at S&P Fund Services. “Everyone hopes market volatility will decrease in 2011, but are resigned to having another difficult year.”
Over 2010 most European fixed income managers have been reducing their exposure to the periphery, unless constrained by their mandates or tracking error. For example, Sandor Steverink at S&P A rated Delta Lloyd L Bond Euro Fund, a eurozone government bond fund, sold all his peripheral exposure early in 2010 as he believes the opportunity cost of being in peripherals and being wrong is much higher than not owning them and being wrong. Managers such as Arif Husain at S&P A rated AllianceBernstein’s European Income Fund, only began to buy small amounts of eurozone periphery in the fourth quarter of the year.
Most other managers owned some peripheral exposure during the year, with some trading their exposure in and out during the year although the declining market liquidity reduced the profitability of this. Those constrained by their mandate included the team that manages the S&P A rated Sabadell BS Fondtesoro Largo Plaza, which must have 70% in Spanish government bonds at all times.
Italy, which has generally been treated as a non-periphery country, was being viewed with more caution in December with some managers, such as Ella Hoxha of S&P A rated Invesco Funds – European Bond Fund, saying that Italy may struggle from contagion in 2011.
However, managers showed a general bias towards investing in the home country as the safe option. Hence Spanish managers were overweight Spanish bonds, Austrian managers Austrian bonds and French managers French bonds, and this held true for covered and bank bonds as well as governments. Corporate bond funds, meanwhile, were using bank bonds as sovereign proxies to trade peripherals exposure.
Several managers noted that their institutional clients are beginning to change government or aggregate mandates from pan-eurozone to eurozone ex periphery or AAA eurozone. This was particularly true of US clients.
Many managers predict that duration and curve could become increasingly important factors towards the end of 2011 if the market begins to look for ECB tightening.
Source: ETFWorld – Standard & Poor’s Fund Services
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