Fixed Income  

M&G’s Leaviss dials down credit risk

M&G’s Leaviss dials down credit risk

M&G retail fixed interest head Jim Leaviss has cut back on credit risk and reduced his overweight to the US dollar as market sentiment soured in August.

The manager of the £1.1bn M&G Global Macro Bond fund said he found it “sensible to reduce exposure to credit risk” in recent weeks.

Mr Leaviss has started selling both investment-grade and high-yield bonds in order to take a more cautious stance on bond markets.

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He had previously held 32.9 per cent of his portfolio in investment-grade bonds, with 17 per cent in high yield.

Spreads on both types of debt continued to widen last month as investors grew more cautious.

The manager said: “We don’t expect a significant increase in default rates in corporates – although US high-yield energy names might be one exception – but the technical demand for credit and market fund flows has weakened in recent weeks.”

Mr Leaviss has been buying protection through credit default swaps as a result of these concerns.

He has also been decreasing his overweight to the US dollar – he started August “very overweight”, but about mid-month he started to reduce the position.

The bond manager has also closed out his Japanese yen short position, which was 3.5 per cent at the end of July.

In addition, Mr Leaviss has added around 10 per cent to his fund’s euro exposure, which stood at 4.1 per cent at the end of July.

The vehicle “still has a significant position in the US dollar”, at 85 per cent, but this was “more in line with its global bond fund competitors”, he said.

“We like the dollar longer term – it will still be the first of the major economies to hike [interest rates], although this may be later than had been expected given the rapid China slowdown and the impact of risk assets and sentiment,” the bond manager added.

Last Tuesday (September 1) it was revealed activity in China’s manufacturing sector had contracted at its fastest pace in three years, sending risk assets down in Europe and Asia and exacerbating fears about a China slowdown that has hit global markets.

Elsewhere, Mr Leaviss remains bearish on emerging market debt. China’s woes have added to the pressure on some emerging market currencies, but he anticipates further falls are around the corner.

The manager has decided to maintain short positions in currencies such as the South Korean won and the Malaysian ringgit, and he is running shorts in the Australian dollar and UK sterling.

Despite his caution, Mr Leaviss said he is maintaining a relatively short duration on his portfolio of just two years as he believes interest rates are destined to rise in the US sooner rather than later.

But he is not yet considering a lower or even negative duration position.

“That will be when wage inflation starts to pick up, and while there are some signs of tightness in some labour markets, wage growth has been stubbornly weak for some time,” he said.