Managed Monthly Income Trust - February 2012
Markets
The ECB is offering European banks unlimited loans out to three years called three year Long-Term Refinancing Operation (LTROs) which has been viewed as a game-changer for banks, not least because the jump-to-default risk for banks is much reduced – at least temporarily. This has led to lower interbank borrowing rates, as banks are more willing to lend to each other, and tighter credit spreads, with financials leading the way.
The US Federal Reserve has also effectively eased monetary policy, announcing its intention to keep rates on hold until at least the end of 2014 (an 18 month extension to its previous guidance). They remain ready with additional quantitative easing (QE) should it be needed.
This easing of monetary policy increases demand for assets which offer a yield above cash while the LTROs, if not the ‘big bazooka’, appear to have been interpreted as offering some hope that the worst of the European debt crisis is behind us. Both these are likely to have been behind January’s rally in riskier assets.
Fund positioning
Michel views January’s credit market rally with caution.
He has generally been adding longer duration bonds, often through the new issues market and continues to diversify exposures geographically. Specifically:
- Sold Next (UK retailer) to increase the fund’s underweight to non-food retail. Sold KPN (Dutch telecommunications company), on the view that it is a weaker name in its sector, with potential for disappointing earnings and risk of rating downgrade.
Sold an HBOS US dollar denominated bond into a more liquid market and switched into an HSBC bond, which Michel views as being a better quality credit that is available at a similar spread.
- Bought Dong (Danish energy company) and Legrand (French electrical fittings manufacturer). The latter has around one third of its sales coming from emerging markets, and as a US dollar denominated bond, also provides currency diversification.
- Sold Dexia (French/Belgian financial. We had bought a Dexia 2013 bond at the end of last year. There are several issuing entities within Dexia Group – this one was issued by Dexia Municipal Agency (Dexma), which finances French public sector institutions. The bond rallied in January on expectations that the French authorities would find a way to restructure Dexma, so we sold the bond/took profits.
- Added longer dated bonds to help manage interest rate risk across the yield curve. Michel has preferred to use bonds in conjunction with futures to manage these risks, as 10 year gilt futures (the only gilt futures available) can be inflexible tools for managing duration. For instance, futures cannot hedge against very long dated yield moves or yield curve flattening/steepening.
- Duration has been extended to +0.5 years, relative to the benchmark. At the end of the month, futures were used to neutralise duration (ie, back in line with iBoxx Sterling Corporate and Collateralised Index), which added value, as yields have risen across the curve in February.
Legal & General Investment Management - February 2012