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Scottish Widows To Stock Up

12 Mar 2004

Scottish Widows Investment Partnership is looking to buy £40 million worth of European telecom and tobacco credits, because it believes both are cheap relative to the market.

Gareth Quantrill
Scottish Widows Investment Partnership is looking to buy £40 million worth of European telecom and tobacco credits, because it believes both are cheap relative to the market. Gareth Quantrill, investment director in Edinburgh, says he plans to add a combined £20 million to the France Telecom 6% notes of '11 and the Deutsche Telekom 5 1/2% notes of '12, to bolster what is already an overweight position in the sector. The increase will raise telecom exposure up a percentage point to 9 1/2% of the £2 billion corporate bond fund. "It's best to remain weighted toward the 10-year end of the curve," explains Quantrill, who points out that the strategy has been profitable this year as longer-duration bonds have underperformed.

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.

12 Mar 2004