London-based Gartmore Investment Management, which runs a $59 million European bond fund, may add tobacco credits such as Imperial Tobacco and Gallagher to its portfolio as a defensive move and to bring more diversification. Richard Hodges, portfolio manager, says Imperial Tobacco and Gallager, unlike British American Tobacco, have limited exposure to the U.S., are well-positioned to weather a further downturn in the global economy and have underperformed significantly year-to-date. The firm is trying to determine at what point these credits offer value, but doesn't have spread levels in mind at the moment. Since the terrorist attacks on Sept. 11, the firm has been reducing its credit exposure and is concentrating on consumer non-cyclicals, utilities, and high-quality subordinated debt in the three- to five-year portion of the curve, from financials such as Barclays Bank and Italy's IMI Sao Paulo.
"We're trying to come to terms with where corporate debt offers value," said Hodges. "Where is credit going to go from here? The steepening yield curve in Europe should imply that defensive plays such as utilities and consumer non-cyclicals are more favored in this current market climate," he added. The firm is also concentrating on the asset-backed market and triple-A tranches of structured deals. The firm has bought Freddie Mac credits and German pfandbrief's across the curve, as well as property and pub securitizations.
Gartmore is also overweight Sweden, which is dominated by Ericsson, the mobile phone manufacturer. The Swedish koruna has been underperforming and should continue to do so under inflationary pressure, making the market cheap. Overall, the portfolio maintains a neutral weighting in telco credits.
Gartmore is long by half a year its benchmark, the Merrill Lynch pan-European broad market index, which recommends a 5.01 year duration.