Marlborough Fund Managers, which manages roughly £50 million in fixed-income assets, has been adding a few dollar bonds to its U.K. corporate bond fund. Bolton, England-based Geoff Hitchin, fund manager, says the fund has the facility to buy overseas bonds and hedge the currency. He sees the attraction of doing that with U.S. bonds, because high long-term interest rates coupled with low short-term rate, makes hedging attractive. By using a dollar forward trade as a hedging strategy, Marlborough gets the currency 2% cheaper than it is on the swap rate, he explains.
Most recently, Hitchin has bought the 5.25% U.S. Treasury of '28 and Prudential Insurance's 6.50% subordinated bond. He will look at the U.S. market as long as the low short-term rate and high long-term rate scenario continues.
Hitchin has also been shortening up his portfolio's duration because he suspects long-term interest rates may have a little way to rise. He hasn't been engaging in a full scale sale of longer-dated paper, but rather putting new cash to work in shorter-term bonds. Amongst the shorter bonds he has bought recently are Carlton Communications and General Motors.
Overall, Hitchin says he is concerned about the tightness of corporate bond spreads. Spreads are too narrow and economic conditions are going to remain difficult for some companies and spreads are likely to widen out, he reasons. The trouble is, picking the time that could happen, he adds. Marlborough measures its funds against its peer groups.
