Edinburgh Fund Managers is reducing the duration of its $450 million fixed-income portfolio from roughly eight years to about six. Edinburgh, Scotland-based Michael Turner, head of fixed interest, says the move was prompted by the firm turning negative on the bond market, because an economic recovery, no matter how strong or weak, will push yields higher once central banks begin to raise rates. The firm uses a variety of benchmarks.
Turner says the firm has been reducing its exposure to subordinated bank debt paper and will continue to do so, because it looks like rate increases will come sooner than later, with the U.K. leading. In terms of overall exposure to spread product, Turner has been reducing exposure to triple- and double-A rated credits, because they are highly correlated to the swaps market. When the economy starts to recover, swaps widen and spreads stop tightening. Accordingly, Turner has been paring exposure to supranational sovereign issuers, such as the European Investment Bank, which has stopped tightening. Instead, Turner is buying short-dated gilts and triple-B rated corporates, especially utilities and industrials. He says he may add to his position in Rentokil's 6 1/8% of '08, which he calls a classic example of a cyclical name. He has just added another industrial Taylor Woodrow's 6 5/8% of '12.
The firm has recently bought paper from ICI, Scottish Power and the food retailer Sainsburys' new issue. The firm allocates its fixed-income assets as follows: 10% to banking, 13% to telecoms, 7% to utilities, 6% to transport, 8% leisure, entertainment and hotels, 5% to media, 13% to food retailers, 2% to general retailers, 8% to beverages, 5% to oil and gas, 5% to financial services, 8% to chemicals, 2% to property, 3% to tobacco, 1% to packaging, 2% to food wholesalers and distributors and the remainder to speciality manufacturers.
