Fixed IncomeNov 26 2015

S&W’s Kenny dips back into euro debt

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S&W’s Kenny dips back into euro debt

Smith & Williamson’s Ian Kenny has been adding exposure to short-dated European corporate debt for the first time in four years after macro risks eased.

The manager’s £451m Short-Dated Corporate Bond fund invests across sterling, dollar and euro debt but hedges back into sterling. It had not held any euro-denominated corporate debt since 2011 but Mr Kenny began increasing exposure this summer.

He said the decision to re-enter the euro market was down to quantitative easing in the currency bloc, reassuring statements from European Central Bank president Mario Draghi, and Greece’s apparent willingness to stay in the union.

The fund’s exposure to European corporate bonds remains minimal at 1.5 per cent, versus 32.5 per cent in dollar bonds and the remainder in sterling, but the manager said he was intending to increase the position further.

“I feel happier about [euro-denominated debt] in the near-term,” he said. He added that diversification would help prevent a loss of wealth in the event of volatility from a US Federal Reserve interest rate rise.

“I will [add exposure to euro debt] a little more but it will never go up to a quarter of the fund,” he said.

Mr Kenny’s fund can invest in debt with a duration of up to six years. But a range of headwinds throughout 2015 meant he has kept duration relatively low even within these parameters, he said.

The manager has taken risk off the table during the year due to the risks posed by the UK general election, the eurozone instability and uncertainty over a Fed rate rise.

Mr Kenny said the fund had lost out as a result, but that his focus was on “preserving wealth”. He added: “There are opportunity costs to everything. What we gave up was the roll up the [yield] curve.

“[The fund normally] recycles the bond curve, so we are losing out on a higher yield on the long end.”

The fund has 20.5 per cent in debt with a maturity of two years or less, with three-to-four-year maturity its largest exposure at 31.6 per cent.

Mr Kenny said the fund did not take currency views in its investments, though exchange rates did affect his portfolio thinking in other ways. “[Currency] affects the view on rate curves and the credit [available] on those curves,” he said.

Notably, the fund does not hold any bank debt, a fact the manager attributed to its aim of providing an alternative to cash. Lending to banks where retail investors hold money on deposit felt counterintuitive, he said.

“It felt odd to hold banks when investors are using the fund for higher returns than bank rates. It does make the universe smaller, but it felt like the right thing to do to be complementary to cash,” he said.

The fund has 12.6 per cent in utility firms, and 8.2 per cent and 8 per cent in pharmaceutical and telecommunication firms respectively. It holds 10 per cent in either cash, gilts or multinationals to avoid being a forced seller in the case of redemptions.

It returned 2.6 per cent in the three years to November 17 against an average return of 0.9 per cent for short and medium-maturity fixed interest funds, according to FE Analytics.