The fund manager also intends to add £20 million of tobacco bonds and will focus on British American Tobacco's 5 3/4% bonds due in '13. "There is good risk-return in this trade, as the growth is there without the sensitivity to anticipated interest rate moves," says Quantrill. Ho notes that tobacco is only a small part of the fund's benchmark, the IBOXX 5-15-year non-gilt index, and says the fund is already heavily overweight; still, he plans to increase that overweight by adding 1% of assets to bring the sector to more than 5% of the overall portfolio.
To finance the move, Quantrill expects to lighten up on water companies and autos as the year progresses. He says the pending outcome of a U.K. regulatory review, which will stipulate water prices and is expected to be completed in the fourth quarter of this year, may be disappointing for fixed-income investors. If so, that would cause the fund to reduce its twice overweight position in a broad-based basket of water companies. In autos, where Quantrill has a carry trade on General Motors at double the benchmark weighting, the trigger for reducing the position would be the increased likelihood of an interest rate hike by the Federal Reserve. Despite this overweight, the fund is underweight the sector.