Global fixed income managers bet on high-quality EM sovereign debt

Global fixed income fund managers are switching to high-quality emerging markets sovereign debt in search of better value, according to S&P Capital IQ’s latest sector trends paper.

Kate Hollis, fund analyst, S&P Capital IQ, said: “While most fund managers expect the euro to survive, they don’t see a lot of value in second-rank OECD sovereign bonds or second-tier supranationals. As a credit view, many regard good-quality EM US dollar- or euro-denominated government bonds as a better bet than those issued by the likes of Greece or Portugal.”

The research was compiled for S&P Capital IQ’s annual review of the global fixed income book to 31 December 2011. Of the managers surveyed, most were underweight or out of the eurozone periphery during 2011 and a number of funds had non-eurozone Europe or EM debt to compensate.

The team at Banque de Luxembourg, for example, has been adding increasing amounts of EM debt to the portfolio and has been heavily underweight the eurozone periphery, the report said. The portfolio held US dollar paper and euro-denominated Turkish, Romanian and Moroccan bonds.

In a similar vein, MFS Meridian Fund – Global Bond was overweight gilts, Sweden and Denmark, while being underweight periphery, Italy, Belgium, France and Austria. MFS aims to own emerging markets sovereign bonds as an alternative to weaker G20 government bonds.

Jupiter’s Ariel Bezalel took large positions in Australian and Canadian government bonds, believing these countries to be better credits than the US, UK, or Germany.

Some funds aimed for a mixed approach, the report found. The team at HansaInvest bought Norwegian, Swedish, Polish and Turkish local currency bonds in the second half of the year, but still held eurozone periphery, namely Greek bonds and Spanish regional debt.

In contrast, Petercam held Greece, Portugal and inflation-linked Italian bonds, implicitly betting on eurozone healing during 2011, with exposure amounting to 18% of the portfolio. However, even they sold down half the Spanish and Italian government holding in January.

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