F&C Management's $1.8 billion euro-sovereign bond portfolio is overweight Greek government bonds, on the view that the credit offers value and yield. Lionel Oster, portfolio manager in London, says Greece's macroeconomic fundamentals continue to improve, and the upcoming Olympics in 2004 should spur domestic demand. He is also optimistic that Greece will continue to reduce its debt, which now stands at 98% of GDP, to 95% by year-end. The Greek government is enjoying stability and is in a good position to maintain its expenses at a reasonable level, he added. Greece's 10-year bond traded at 47 basis points over German bunds last week, and Oster predicts that will tighten to around 35 over the next 12 months. If Greece performs as expected, the fund will take profits and revert to the core European markets Germany and France.
Right now, the fund is overweight in the 10-year area of the curve, because that's where Oster expects a rally. In the event of a rally, the fund will take profits on duration, bringing it back in line with its benchmark's duration. Profits will be converted into bonds with maturities of less than two years to lower volatility.
The portfolio is short Germany and France, because there isn't enough yield, says Oster. F&C had been long these countries a few months ago, but had the view there was too much optimism in those markets and decided to take profits. "We still like the market, but we're not that aggressive anymore," he said. The portfolio uses the EFFAS Euro Government All Stocks Index as its benchmark. The fund's duration is about 5.4-years versus its benchmark's 5.0 year duration.