| First signs of bond managers using 130/30 |
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| 25/11/2007 | |
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The growing appeal of 130/30 as a long-short strategy has so far been confined to equities, however, that may be changing. Barings Asset Management is implementing the fixed-income version of the strategy on behalf of at least one U.S. pension fund which it declined to name. "It is something very new. We started in the middle of 2007 in order to take out the asymmetries inherent in the fixed-income universe," says Jonathan Cunningham, head of Sales at Barings. By relaxing long-only constraints, fixed-income investors can achieve excess returns from at least four different sources. The main sources of excess return for actively-managed fixed-income mandates are inter-market spread positioning, duration positioning, yield curve, credit and currency positioning, according to Barings. The one area where 130/30 may not prove to be an optimal fixed-income strategy is in duration positioning since a manager already has considerable freedom in adjusting the duration of a portfolio relative to a benchmark. "With duration management you can go from seven to zero fairly easily," says Cunningham. Weight matters The case for pursuing 130/30 is particularly strong in the area of inter-market spread positioning. Let us take the example of a portfolio manager with a view that Australian bonds are over-priced compared to US Treasuries. The low index weight for Australia makes it difficult to take a meaningful underweight position unless the long-only constraint is dropped. "If you look at the global indexes such as the Lehman Global Aggregate Index, you see that some countries have a proportionally lower weighting which does not allow a portfolio manager to go more underweight than zero," says Cunningham. "130/30 gives the ability to go short." Barings did just that with currencies. Prior to the parliamentary elections in Poland in October, Barings viewed zloty weakness as excessive. It also expected more pressure on the dollar. Accordingly, it took an absolute USD short position versus the zloty as part of a fixed-income 130/30 strategy. What if a bond manager with an unfavourable view of a minor currency with a low weighting in the Lehman Global Aggregate Index wanted to take a directional bet? "If our hypothetical portfolio manager wanted to underweight the zloty in the expectation that it would fall against the euro, the biggest position which could be taken against the index would be 0.1% of portfolio NAV. The zloty could fall by 50% against the euro and only 20bps would be added to relative performance utilising a long-only approach. We believe that using 130/30 allows for a broader spectrum of pair trades and provides the capacity for bond managers to add value through the correct anticipation of weakness in a minor currency." VB |
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