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| Robert McHenry |
McHenry is head of global fixed income at the Hartford Investment Management Co. and manages $3.5 billion in insurance assets invested in European and U.K. bonds from Hartford, Conn. McHenry has been at HIMCO since 1997. You recently announced you are launching core-plus funds for outside investors in Europe. Why are you doing this now?
We've become what we think are experts at investing in investment-grade credit in Europe and the U.K. We've been investing in that region since the end of 1998 and have a good track record. Because bond issuance is particularly in government bonds, there's a lot of interest in higher-yielding securities. This is very much a theme in Europe.
One thing that's going to change in Europe and the U.K. is pension plans are going to become more like plans in the U.S. The words "core-plus" will become common for U.K. and European plans when referring to fixed income. High-yield and emerging markets all blend into one style and that kind of style will start to become the norm. Given that our U.S. analysts are well-placed to make those investment decisions, we believe that fits extraordinarily well with the growth in need for pension funds in the U.K. and Europe for investment expertise.
There is some legislation pushing plans out of equity into fixed income. All these government bond markets have converged because of having the same currency. As the years go on, investors will go further out in the market. It's funny being English and having worked in the U.S. for a long time; it's like that movie "Groundhog Day" and seeing everything repeat itself.
Why would European investors turn to a U.S.-based manager rather than searching for that expertise at home?
They are [finding that expertise locally, too]. But we feel we have that expertise. There's a big overlap in the number of issues or names of bonds, such as Ford Motor Co., who issue in euro and sterling. We have a large credit team at the company that can follow industries for many years. We know those credits very well and have blended our American and European expertise.
What index do you use as your bogey?
Of course the Lehman Brothers Aggregate Bond Index is key in the U.S., but we're using the Merrill Lynch Sterling Broad Market Index and the European Broad Market Index. Our systems just happened to fit better with those indices on the international side; there's actually not much difference between the two of them. We use emerging market currencies to add value as well as make duration decisions and make asset allocation decisions between corporates and governments. Fortunately, we have a staff of 89 investment professionals and we use exactly the same folks to help us with that project.
How are your portfolios positioned?
We are quite neutral in duration, which is a change because we've been quite bullish. But we've been less optimistic the past couple of weeks. We feel the markets are fully pricing in the good economic news we've seen recently. There's a little less momentum in price action, fundamentals feel aligned and we feel the market is pretty much fully valuing yields right now. In the past we've had some aggressively bullish positions on duration for a long while, but we've gone neutral because we don't want to take risks by staying where we've been. We felt that the European and U.K. bond markets were attractive based on the economies starting to show signs of slowing and felt yields would come down. Also we thought economic growth would bring inflation levels somewhat lower.
In Europe we've had a slight underweight in credit and have put on an overweight in governments. Investment-grade credit is expensive and spreads are extraordinarily tight. For our European core-plus strategy, we've moved away from investment grade back to governments.
Within corporates we're underweight consumer cyclicals because we feel they'd suffer as part of the slowing down of the economies. We're underweight banks because spreads are quite tight and there's not much yield pick-up over government bonds. We're overweight telecoms and utilities.
What are the challenges of finding investors in the U.K. and Europe?
We think this core-plus product is likely to become the norm and we want to make sure we're there when it does. We're well positioned in terms of growth of the market and have the expertise and track record to make us a contender. But as with everything, you have to prove to the market you have the staying power and the commitment.