Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
September 17, 2012 01:00 AM

ECB pledge boosts bets on debt of eurozone periphery

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Hannalore Foerster/Bloomberg
    Liking: Managers welcomed Mario Draghi's pledge to purchase bonds of some European nations.

    Some bond managers are making hay on the recent turnaround of sovereign debt issued by peripheral eurozone countries as European leaders have made sweeping commitments to solve a debt crisis now in its third year.

    Managers' strategic purchases of these bonds are in stark contrast to earlier in the crisis, when managers would only dip in and out of these struggling countries' debt tactically.

    BlueBay Asset Management LLP, Franklin Templeton Investments, J.P. Morgan Asset Management, Loomis Sayles & Co. LP, Pacific Investment Management Co. LLC and Prudential Fixed Income all have been buying one or more of the eurozone peripheral countries of Ireland, Italy, Portugal and Spain. Most managers are still avoiding Greek bonds because of default risk or being too lowly rated for inclusion in their strategies.

    The buying gathered momentum ahead of the Sept. 6 speech by European Central Bank President Mario Draghi, in which he committed to buying short-term debt of European countries to suppress yields.

    “The ECB delivered everything the market was expecting, and the details were significant,” especially that buying was effectively unlimited and that the bank would take an equal legal position to other creditors, said Nick Gartside, international chief investment officer for fixed income at J.P. Morgan Asset Management in London. “It's not without implementation risk, but at least now we know the rules. That's a very big difference from even just a few weeks ago.”

    Mr. Gartside had moved to neutral from an underweight position earlier in the year, and near the time of Mr. Draghi's speech he moved to overweight Spain and Italy. He also increased positions in Irish debt about a month ago. “We felt there's a risk that Ireland is upgraded (and that) valuations were attractive compared to other eurozone bonds,” he said. His $3 billion strategic bond fund returned 4.9% gross of fees in the eight months through Aug. 31 vs. 0.37% for the London interbank offered rate; the three-year annualized return was 8.05% vs. 0.55% for the benchmark.

    “In a world where yields are really low, a lot of those countries represent very attractive opportunities,” said Robert Tipp, managing director and chief investment strategist of Newark N.J.-based Prudential Fixed Income, which runs $348 billion. In the $272 million Prudential Global Total Return Fund, Mr. Tipp has moved to overweight on government bonds from Spain, Portugal, Italy and Ireland. The fund has returned 8.81% so far in 2012 and an annualized 9.63% in the three years to Aug. 31.

    More than ever, managers are convinced European policymakers will drive — or will be driven to — tighter fiscal and political integration of the 17-member union. That's giving managers the confidence to venture into these riskier government securities, but they recognize the road to unity will be bumpy and uncertain, so they're staying tactical, too.

    Push toward integration

    “That's certainly the direction of travel at the moment. But I think that journey is a slow, slow journey,” and valuations are being determined by short-term dynamics, Mr. Gartside said.

    Mark Dowding, partner and co-head of investment grade at BlueBay Asset Management, London, said: “It's really only been since the start of this year that we've had a more constructive stance” on Spanish and Italian bonds, which he'd previously only held in relative value trades.

    Mr. Dowding is relatively optimistic about the future of the eurozone and has taken directional bets on Spanish and Italian bonds. But he invests in sovereign bonds in Europe, even for corporate bond strategies, because of their greater liquidity — that's necessary when trading opportunistically, which he'll continue to do in the periphery. “There will be cycles of volatility, and that's what provides us investment opportunities,” he said.

    BlueBay has started taking profits on some of these bonds, following a method in which it buys during times of stress and sells following relief rallies. The method delivered 11.1% in the first half — in euro terms and gross of fees — in the firm's long-only European investment-grade euro government bond fund, topping the Barclays Capital Euro Aggregate Treasury index by 543 basis points. Annualized performance since its Dec. 22 inception is 10.15% vs. 5.58% for the benchmark.

    Kathleen Gaffney, vice president and portfolio manager at Loomis, Sayles & Co. LP, Boston, has experienced firsthand the riskiness of peripheral debt. “We've been watching this space for quite some time” and ventured into Irish, Greek and Portuguese debt starting in 2010. She lost money on Greek and Portuguese positions, but Ireland was a winner. So when Italian and Spanish yields recently pierced 7%, she bought. “That, in our minds, represented good value,” she said.

    She's also bought corporate bonds in the periphery, which are a “bargain” compared to U.S. high yield, she said. Ms. Gaffney's go-anywhere strategy, in which she runs $21.4 billion, returned 11.08% net of fees as of Aug. 31 and an annualized 12.27% over three years.

    Political fate

    Periphery naysayers cite the fact that Europe's fate — and that of some of its sovereign bonds — lies in the hands of not markets or macroeconomics but politics.

    “The solution to this problem is political. By definition that makes the outcome difficult to gauge,” said Russell Silberton, head of developed rates and currency at Investec Asset Management, London. “We don't think the risks are worth the rewards.”

    Mr. Silberton said the valuations of some peripheral bonds were “absolutely” tempting. “The problem is, the level of the risk premium in those markets is highly uncertain. At best, it's a guess,” he said.

    Michael Cirami, vice president and portfolio manager at Eaton Vance Management, Boston, said the ECB's commitment to buy bonds doesn't address the solvency or competitive issues of peripheral countries: “It's just the latest example of kicking the can down the road.”

    Instead of peripheral bonds, Mr. Cirami likes bonds of the “CE4,” or central Europe four, “Europe's other periphery” of Poland, Czech Republic, Slovakia and Hungary.

    Mr. Silberton said that as some government bonds have taken on credit-like characteristics, he's looked to bonds from countries outside the eurozone, like Sweden and Norway, to boost returns while keeping risk low.

    But BlueBay's Mr. Dowding doesn't buy the argument that it's safer to invest in only AAA rated government bonds, or in funds that do. “Those funds have actually seen negative returns and greater volatility than those (strategies) that have performed better,” he said. “Instead of a risk-free return, what you end up with is a return-free risk.”


    Reporters Thao Hua of Pensions & Investments and Jeff Benjamin of P&I's sister publication InvestmentNews contributed to this story.

    Related Articles
    Loomis Sayles Bond Fund co-manager departs
    BlueBay names new global business development chief
    ECB calls on BlackRock for design help for ABS purchase program
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    Morningstar Indexes' Annual ESG Risk/Return Analysis
    The Future of Infrastructure: Building a Better Tomorrow
    Outlook 2023: Opportunity in a volatile world
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing