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| Stephen Rodger |
Baillie Gifford will reduce its roughly £70 million position in asset-backed securities on the back of proposed U.K. legislation that would make it more expensive for insurance companies to hold certain bonds and could induce spread volatility. "A triple-B rated structured bond still has a better yield than a triple-B corporate bond, but the differential is nowhere near where it has been the last few years. Now, you're lucky to get five to 10 basis points extra and we're expecting margins to narrow from here," says Stephen Rodger, Edinburgh-based fund manager responsible for Baillie's £500 million worth of investment-grade debt. The firm is currently running a 14% position in ABS relative to 11% in its benchmark, the Merrill Lynch non-gilt index. Rodger declined to say how much he would sell. On the flip side, Rodger sees more attractive opportunities in the corporate bond market on the back of the proposed legislation. The Financial Services Authority's Consultation Paper 195 would force insurance companies to hold more capital against certain investments and Rodger expects it to reprice certain assets, including ABS. He plans to focus on pure credit stories but declined to say which assets he would look to buy, except to note that bonds favored by investment bank research analysts tend to get over-priced for their credit rating (with a single-A bond that is hyped getting priced at the same level as a triple-A bond, for example).
"We operate in a very inefficient market," Rodger points out. "CP 195 will have the effect of making expensive corporate and structured bonds cheaper, and cheap bonds more fairly priced. These kinds of price movements provide attractive opportunities for us."
Rodger currently has a large position in France Telecom that he would be happy to reduce after the recent upgrade and possibility of a single-A minus from one of the agencies. He would be a seller of FT's 8% of '17 if spreads tighten to 75 basis points over (the bonds were trading at 101 over last Wednesday).
