According to a sector review from S&P Fund Services, fund managers are taking advantage of attractive valuations to increase corporate credit risk as spreads widen.
Overall fund managers in the sector remained cautious, S&P added, but for some the buying list includes both investment and high yield corporates.
Managers who held above-average levels of cash in anticipation of more volatility are among those who reduced cash holdings first.
S&P used the example of Paul Causer and Paul Read, who run the S&P AA rated Invesco Perpetual Fixed Interest Investment Series Tactical Bond fund.
Causer and Read let cash build up to over 30% of the fund’s value in the first half of 2011 and have recently invested a lot of it in Spanish, Italian and French risk, using cash bonds and credit default swaps.
On the opposite side of the fence is Fidelity’s Ian Spreadbury, who holds 12% in cash and 25% in government/supranational bonds in his Strategic Bond fund.
Spreadbury said significant tail risks, including the potential of a double dip recession warranted a defensive position, particularly given the lack of strong leadership in the US and Europe.
S&P said the trend to expand the duration guidelines of bond funds continued in order to increase competitiveness and protect investors’ capital.
Standard Life’s Corporate Bond fund can now have 3-9 years portfolio duration, down from 6-9 years and the Old Mutual Corporate Bond fund has modified its perameters to a a 0-9 year range.
The key issue is that managers do not want to be constrained in a rising bond yield market, particularly as base rates are forecast to remain low for the medium term.
In his weekly update, Kevin Gardiner, head of global investment strategy at Barclays Wealth, said the bank’s fixed income portfolios had extended their cash overweight to reduce risks.
Government bonds were cut to underweight, as the flight into them in recent weeks left them looking overvalued, he added.
Finally, investment grade credit, high yield and emerging market debt remained underweight in the face of high risks.
