Insight Investments is sticking with single-A and triple-B rated corporate bonds with short maturities, according to Andrew Evans, head of credit research in London. He does not anticipate any major strategic shift in the credit rating or maturity positioning of the firm's institutional portfolios between now and year-end, but noted the firm will undertake tactical trades on a relative value basis.
Insight manages about £44 billion in fixed income, predominantly in sterling, with 45% in govvies, 40% in corporate bonds and the remaining in index-linked bonds and cash. Within a total of £7 billion invested for institutional pension fund clients, the corporate bond holdings are benchmarked against the Merrill Lynch non-gilt indices.
Strategically, the firm is overweight five- to 15-year corporate bonds and is underweight 15+ years. "With very flat spread curves going into the year and fear over the implications of U.K. insurance regulation PS04/16 coming into force, there has been little incentive to be investing at the longer end of the curve," said Evans, noting the yield pick-up between a five- and a 25-year is still merely 20 basis points. He does not expect the curve to steepen significantly before the response of U.K. life insurers to the new risk-based capital regime is clearer.
Insight has a large strategic overweight in single-As and a smaller overweight in triple-Bs, while being neutral triple-As and slightly underweight double-As. "Most of the indicators of credit fundamentals are still strong, although--crucially--the rate of improvement is slowing," noted Evans. The manager predicts it will still be several months before default rate trends, volatility levels, or corporate leverage start to send a more worrying signal. But the credit cycle has entered a more mature phase which is fully reflected in credit spreads.
The firm sees attractive investment opportunities in subordinated bank debt, energy names and telcos, while staying underweight in utilities and the senior financials such as the supra-sovereigns and agencies, which will be the first to suffer from further widening of swap spreads. However, strong sector themes are in short supply and industry allocations owe much to individual credit stories, Evans emphasized.
While the firm will not change its core strategic allocations, it will put on tactical trades on a sectoral basis. It went short the auto sector in the second quarter, for example, and moved back to a neutral position at the wider levels in October. "We're willing to add a little more beta for the fourth quarter and we've also been adding slightly at the long end after the curve steepening we've seen," said Evans.