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| Alan Wilde |
Wilde is a director of fixed income and currency at Baring Asset Management in London. His team manages $18 billion in fixed income for investors including pension funds and central banks. The bulk of his clients are located in Asia and the U.K., with a smaller client base in the U.S., Europe and the Caribbean. He joined Baring last November from Abbey National Asset Management.
Where are you adding value?
We're very heavily skewed toward high-grade assets, mainly governments. We haven't liked credit for the past nine months. But we're adding value in what you might call peripheral markets. We own Mexican bonds and currency exposure. Poland is another bond we own; those yields have come down to 5.5% from 7.5% two years ago.
We have just over 3% exposure there to Singapore bonds. The fundamentals for these bonds are actually quite good: the central bank is bearing down on inflation, growth is relatively soft and they have problems with competitiveness in Asia generally as China exerts more influence.
Do you use derivatives?
We just got permission to use swaps in some of our portfolios. We've been trialing the use of swaps as a proxy for some of our absolute return funds 1) to see if we can find greater liquidity and 2) just to see if we can make things a little more efficient in terms of portfolio execution. We don't use credit derivatives at the moment.
What are the barriers to your clients using credit derivatives?
Because our clients are mostly pension funds, the trustees need to be comfortable this is viable means of taking exposures. It's partly an exercise in education. As a fund manager you always want to have as much flexibility as possible. But if the clients are not ready for it, you have to wait until they're comfortable or lead them. People always have this idea credit derivatives are sinister because of leverage and people losing money.
How do you think pension reform will play out in the U.S.?
The resumption of [the issuing of] long-dated bonds is in part driven by end investor and bank demand for long-duration assets. In Europe, when pension funds started to compare liability mismatch, they bought swaptions and in doing so the banks were exposed to long-duration risk. [The banks] always say they're hedged but part of the demand for longer dated bonds comes from investment banks who are worried they don't have enough long-duration assets to cover themselves.
The U.K. is much further down the road in terms of adjusting for the pension fund industry's mismatch of assets and liabilities. My feeling is the American approach to pension reform might not be as draconian as regulations in Europe. They probably recognize driving people into long dated bonds when yields are so low may not be the best idea in the world and only delays the problem for some time down the road. I think you'll get a watered-down version that will partially encourage people to close off some of the risk they're running in their benefit schemes. But you won't get the complete, "We must buy long bonds because that's the only asset we can own to discount our liabilities."
I don't think the buying of long bonds will be as pronounced in the U.S. as a result of the reforms. I think you'll find that's part of the reason the Federal Reserve is talking about re-issuing the 30-year is because they recognize there's going to be demand. If you don't have a liquid instrument to fill that demand in some ways you have two different parts of government working in opposite directions: one says you should close off your risk while the other says, "We're not supplying you with a long bond." That's what happened in the U.K. in the early stages--people were buying long dated bonds when supply was drying up. That drove them to scarcity premiums, which in the long term doesn't do anyone good.
What kind of strategies is Baring focusing on?
Some of our European accounts, typically in the insurance area, are looking for absolute returns, so we've developed portable alpha strategies where we have to get an absolute level of return instead of relative level of return against benchmark. These strategies embody a lot of what hedge fund managers try to do without the leverage. We hope to add value through exposure to derivative markets. In these strategies you could simply buy the swap of the underlying government market instead of cash market. But even where you can use derivatives, we're not using credit default swaps but more interest-rate swaps and futures.