Global fixed income fund managers are switching to high-quality emerging markets (EM) sovereign debt in search of better value, reports Standard & Poor's (S&P) Capital IQ's latest sector trends research
Fund analyst Kate Hollis explains that while most fund managers say they expect the euro to survive, “they don’t see a lot of value in second-rank OECD sovereign bonds or second-tier supranationals. As a credit view, many regard good-quality EM US dollar- or euro-denominated government bonds as a better bet than those issued by the likes of Greece or Portugal.”
Fund managers reported being underweight or out of the eurozone periphery during 2011 and a number of funds had non-eurozone Europe or EM debt to compensate. “The team at BL (Banque Luxembourg), for example, has been adding increasing amounts of EM debt to the portfolio and has been heavily underweight the eurozone periphery. The portfolio held US dollar paper and euro-denominated Turkish, Romanian and Moroccan bonds.
In a similar vein, MFS Meridian Fund – Global Bond was overweight gilts, Sweden and Denmark, while being underweight periphery, Italy, Belgium, France and Austria. MFS aims to own emerging markets sovereign bonds as an alternative to weaker G20 government bonds,” reports Hollis. Jupiter’s Ariel Bezalel confirmed its approach of taking large positions in Australian and Canadian government bonds, believing these countries to be better credits than the US, UK, or Germany.
Other funds seeking value outside the eurozone, whilst not abandoning it entirely, aimed for a mixed approach. The team at HANSAINVEST said they’d bought Norwegian, Swedish, Polish and Turkish local currency bonds in the second half of 2011, but still held eurozone periphery, namely Greek bonds and Spanish regional debt.
In contrast, Petercam said its strategy was to hold Greece, Portugal and inflation-linked Italian bonds, “implicitly betting on eurozone healing during 2011”, with exposure amounting to 18% of the portfolio. However, this fund manager confirmed selling down half its Spanish and Italian government holdings in January.
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