Fortis Investment Management, which manages E22 billion in fixed-income assets, will extend duration on its government bond portfolio once the yield on 10-year bunds hits 5%. As of last Tuesday, the 10-year bund was yielding 4.81%. Xavier Timmermans, Paris-based head of fixed-income funds, says Fortis has dramatically reduced duration versus its benchmark, the J.P. Morgan European Monetary Union All Maturities Index, in response to abnormally low yields. Fortis' fixed-income portfolio is at 75% of its benchmark duration, which is now 5.26-years.
Yields are abnormally low due to a flight to quality, says Timmermans. Fortis is underweight on the short- and very long-end of the curve. The firm had been neutral on the 10-year portion, but recently has bought the 30-year, because it wanted to be more neutral on the long-end. "We thought pension funds and insurers would try to hedge liabilities on the long-end," says Timmermans.
Timmermans says the firm is waiting for stock prices to rebound before bolstering its allocation to credit. "For the moment, we are prudent. Normally, from a textbook point of view, now is the time to buy credit. If you believe the economy and credit quality is improving, you buy credit," he says. Fortis manages E18.6 billion in government bonds, E1.8 billion in corporates and E1.6 billion in an aggregate portfolio comprised of governments and corporates.
