London-based Baring Asset Management is scaling back its position in European government bonds and is looking to add to U.S. and Canadian government bonds, said Marino Valensise, head of fixed income. It favors taking a barbell approach with five-and 30-year securities. "We've been overweight Europe for years, which has been the right call, but now we see value returning to the U.S. and Canada and are cautiously eliminating our underweight in those regions," said Valensise. He declined to quantify the size of the asset shift. Baring's funds are benchmarked against many different indices and it runs $17 billion in fixed income overall, more than $10 billion of which is in global government bonds.
In the U.S. and Canada, Valensise believes government bonds are pricing in some overly negative yield movements and are therefore attractive buys. The fund manager has already started building a barbelled investment strategy in Canada, and in the U.S. will start shifting money into Treasuries once the market drops another leg down, which Valensise expects will occur in the coming months. In addition, he plans to start buying 15-or 30-year bonds of Freddie Mac and Fannie Mae if volatility continues to increase. "Volatility has been very low the last six months, but with the rise we've seen in the past four or five weeks, buying mortgages is becoming more attractive," said Valensise.
Baring is aggressively underweight credit, with less than $7 billion in the asset class and almost all of that in investment-grade bonds. Within investment grade, Valensise favors subordinated bank debt, which he expects to suffer less as spreads start to widen again. "We like something with spread that is less risky than corporates and there's no chance the large U.K. clearing banks are going to go bust," he commented. Meanwhile the firm is steering clear of high-yield bonds, with a mere $300 million in sub-investment grade, which he may let dwindle to nothing. "If we don't start buying again, we'll lose 25% of our high-yield holdings each year for the next four years as the bonds mature or are called," noted Valensise, who said he is not planning any high-yield purchases.
