Schroder Investment Management, which manages £3.3 billion in gilts and £8 billion in total fixed-income assets, will wait until yields on 10-year gilts are in the 5.35-5.4% range before reconsidering its slightly short duration strategy. Last Monday, the yield on the 10-year was 5.14%. Andrew Argyle, associate director responsible for conventional gilt portfolios, says the firm moved short to its benchmark, the All Stocks Gilt index, by one quarter of a year. The benchmark's duration is 6.5-years. Argyle says he made the adjustment because he feels yields are range bound for the moment between 5.10% and 5.40% and the firm has taken the opportunity to go a little short at 5.15%.
Currently, Schroders also is overweight corporate credits. "Over the course of the first quarter, and so far this quarter, the principal thrust of the investment policy is to be overweight single-A and triple-B corporate bonds. There is still considerable opportunity for those credits to tighten quite a bit, because of pension funds' involvement in the market," says Argyle. Lower-rated bonds offer more value, he adds because pension funds went into triple-A bonds initially and then into investment grade more generally, and accordingly, lower-rated bonds' performance has lagged.
Argyle says the firm has been trading its portfolio around a little bit and is positive on lower-rated cyclicals and is overweight financials. Lately, the firm has bought tier-one bank debt from Scottish Mutual and HBOS as well as new issues from McDonald's, Rexam (a manufacturing firm) and RWE (a German utility). Argyle says he added these new issues because they came at relatively attractive spreads. He says the firm sold gilts of similar durations to fund the new purchases so as to keep the trades duration neutral.
