De Mello, manager of the $1bn Schroder ISF Asian Bond Absolute Return and $62.3m Schroder ISF Emerging Market Corporate Bond funds, lowered the currency, corporate credit and government bond risk in the past few days.
“We reduced some of the currency positions, which was more than just ‘tweaking’ [the portfolios] – it was sizable,” the manager said. “We also reduced credit and we increased a bit of duration in the portfolio.”
The duration of the portfolios was increased by about one-quarter of a year. “By itself, [the duration move] is not very much but if you take into account the currency and credit reductions, we have taken out risk”, he added.
De Mello, who is also Schroder’s head of Asian fixed-income assets, described the fiscal cliff – which is a combination of expiring tax breaks and cuts to federal spending that threaten to restrain US economic growth – as an “immediate and fairly big” risk.
The manager highlighted Barack Obama’s narrow victory in this week’s presidential election as a concern, as this increases the risk that a timely deal will not be reached on the fiscal cliff.
“There is this belief that they will eventually get to a deal – and I do think they will eventually make a deal – but the path to that deal could be quite volatile,” he said.
However, De Mello added that the defeat of Republican candidate Mitt Romney has removed one risk from the market. Romney had said he would label China a currency manipulator, which would have been negative for the region.
“Any kind of trade war or problems between the US and China definitely would have been a worry for Asian currencies,” the manager commented.
