Barclays Global Investors is overweight the shorter-end of the curve in low beta single-A and triple-B names--rather than more highly rated LIBOR-related names--based on the view that fundamentals will remain strong and swap spreads will widen. "Global economic growth, good profitability, and balance sheet de-leveraging all favor single-As and triple-Bs, and on top of that the demand technicals are good, what with pension funds still adding to their bond allocations," observed Tim Webb, head of credit investment. BGI has £30 billion invested in government bonds and some £15 billion in corporate bonds, supra-sovereigns and asset-backed securities--benchmarked against the Merrill Lynch All-Stock Index.
Webb is putting the emphasis on low beta names because, he says, investors are not getting paid to take on the risk of higher-beta, more cyclical names. "Over the past year the spread between a stable and a volatile triple-B has narrowed from about 150 basis points to 20bps," Webb observed. "Today there is a marked lack of dispersion within rating buckets." As a result, Webb has a neutral weighting in high-yield names, and is 5-6% overweight low beta industrials. He favors food retailers as well as telecommunications companies, calling the latter 'post-event credits' that have undergone balance sheet restructuring and whose earnings streams have become increasingly like those of utilities.
The fund manager also has a 10% out-of-benchmark bet on U.K. gilts, on the view that credit spreads will widen. His other overweight--also 10%--is in asset-backed securities, where he favors wrapped public finance initiative triple-A paper.
BGI is steering clear of swap sensitive areas like the LIBOR-related triple-A and double-A rated names in the supra-sovereign area, such as European Investment Bank and KfW Bankengruppe. The asset manager is 20% underweight the supra-sovereigns overall, and has a 5-6% underweight in financials. "Ten-year U.K. swaps have already widened from 15-20 bps over govvies to the mid-30s, and we think they could easily widen a further 10 bps by the end of the year," said Webb.
Webb also shuns names with high event risk. He avoided the recent sharp declines in Boots and Marks & Spencers, for example. "If we're going to see spread widening, we want to be in those names that will widen less," he noted.
