Investec’s Stopford hedges against crisis
Strategic bond manager initiates ultra-bearish trade to cushion against ‘risk off’ market sentiment.
Investec Asset Management’s £357.1m Strategic Bond fund manager John Stopford has reacted to the worsening eurozone crisis with a trade in credit default swap (CDS) indices.
The manager has hedged half of his corporate bond exposure with a giant trade in the iTraxx Crossover index of CDS – derivatives that protect against bond defaults. He has also added a position in the iTraxx Financials sub-index.
Mr Stopford’s corporate bond exposure is 55 per cent of the fund, but he started hedging the exposure in late February, after previously adding risk in December 2011 and January this year.
“I would say the position is quite risk averse and is probably one of the largest hedging positions I have had on the fund,” he said. “Tactically I am much more defensive than I would tend to be, given the economic environment.”
The manager said that he does favour corporate bonds but has bought the hedge due to the current high levels of uncertainty surrounding the Greek debt crisis, and concerns the nation may be forced to exit the euro.
“If I could close my eyes and own [corporate debt] for three years I would be comfortable with a higher position, but volatility is elevated and event risks are big and unpredictable,” Mr Stopford said.
“What I need to see is a more significant global recovery and a clear, concerted effort by the European authorities to bring the rolling crisis to an end. Without this it is hard to be aggressively positioned unless markets become more mispriced.”
Mr Stopford said the bond markets had been hit by the ‘risk-off’ mentality that has pervaded in the past few weeks but that equities had been hit harder.
However, the manager said in the run-up to the second round of Greek elections and amid some weak economic data recently, he will remain cautious.
Elsewhere, Mr Stopford has boosted his weighting in sovereign debt in the past couple of months, after the recent brief sell-off in gilts.
“Yields spiked up coming into the second quarter as we took advantage of that. We didn’t expect a bear market but we didn’t anticipate quite how sharply yields came back in,” he said.