Old Mutual has dropped its benchmark for the OMFM Worldwide Bond Trust believing it was trapping the...
Old Mutual has dropped its benchmark for the OMFM Worldwide Bond Trust believing it was trapping the fund into taking exaggerated heavy positions on Japanese government bonds.
The group will no longer use the Lehman Brothers Global Bond Industry Index as a benchmark and instead has constructed one based on 10% in Japan coupled with a split of 37% into the US dollar bloc and 53% in Europe.
The current fund asset split is 35% in the dollar bloc, 10% in Japan, 53.75% in Europe and 1.25% in cash.
Bob Attridge, fund manager of the Worldwide bond trust, said a conventional global bond index based on market capitalisation pushes fund managers into taking heavy positions in Japanese bonds simply because the Japanese government is using Keynesian-style debt issuance to try to kick start the economy.
If a fund manager was tied to the benchmark, even with scope to go underweight the index, he would still be forced to take holdings in Japanese debt, he said.
That effect could be quite extreme as the dollar bloc and the European governments issue less debt or redeem debt because of their healthy fiscal positions, Japan is left as the world's major debt issuer, he added
Attridge said: "If I asked the question, 'Why am I buying more Japanese bonds?' the answer is that I am giving them more money because the government finances are in a mess.
"In the long term that index was becoming less representative of what people would expect from a global bond fund.
"Since changing the benchmark we have moved from being overweight in the dollar bloc to being slightly underweight there and slightly overweight in Europe. In Europe we are a couple of percent underweight in sterling. We have no Denmark or Sweden and are a bit overweight the euro as the currency has turned. The euro has been very difficult to follow on fundamentals. It should not have got so low. We think that there are some signs that it is beginning to turn around."
Old Mutual is also making a convergence play on Greek bonds across all its global bond portfolios.
The play on Greek bonds depends on the fact that upon joining the single currency next year, the Greek government will be required to bring interest rates into the narrow band allowed in the single currency block.
The yield differential against comparable German government bonds currently stands at around 1%, having widened from 0.75% in spite of the announcement of the inclusion of Greece in the currency bloc.
Attridge said: "The widest spreads over Germany currently in the Euro-bloc are about 0.4% or just under for Portugal and Italy. There is therefore potential for the Greek bond yield differential to fall.
"We think it will probably come down to about 0.5% over the next 12 months, and expect to see a consequent outperformance in Greek bonds."
Attridge has bought the 2014 bond because the longer date is more price sensitive than shorter bonds and therefore it would provide greater capital gain from yield convergence.
He said that an instantaneous 50 basis points fall on the 2014 bond would cause a capital gain of around 4.5%.
He expects to lose some of that as the drachma is scheduled to depreciate by 1% prior to Greece's entry into the currency block.
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