Threadneedle's AAA-rated Fitzsimmons on how to play flatter yield curves

On a two month view, he is positioned for a short term strengthening of the yen, having put an option in place.

‘The Japanese continue to talk about intervention but what is needed is more colossal than they have the appetite for. We think something dramatic could happen so having an option gives us limited downside but potentially unlimited upside.’

Credit exposure reduced

Fitzsimmons says his team has recently reduced its credit exposure. ‘We are more cautious because there has been huge earnings momentum but it is now levelling off, which is less supportive of the credit market,’ he said. ‘We prefer well-financed corporate exposure because some of the juice has come out of the credit market, although we remain long credit overall.’

He has also added more sovereign guaranteed paper to his portfolios. ‘Short-dated government bonds is not a silly place to be. We are conservative, with a focus on some longer duration at the expense of taking some credit risk.’

Understanding political motives crucial

Fitzsimmons believes it is more important than ever for fund managers to be able to anticipate and interpret politicians’ intentions so they can position their portfolios accordingly.

‘Fund managers should be apolitical. Our job is to understand and interpret how politicians’ motives and actions translate onto markets and into regulation. We have to adapt to the situation. Understanding the interaction between what is populist and the subsequent pressures on politicians is now key to interpreting and anticipating change.’

Fitzsimmons cites Germany’s steps to prevent short selling of euro sovereign entities as an example of how he positions his portfolios. ‘It tells you that strong measures
will be taken to protect the monetary union and means we have been guarded about using credit default swaps to buy insurance against sovereign default, because governments at a stroke could ban these types of transactions,’ he said.

Austerity packages

Key in this area is how fiscal austerity is to be implemented by governments, he added. Fitzsimmons is mindful of the risks of a double-dip recession in the US when unemployment rates remain so high and is watching the macro imbalances allegedly caused by China’s exchange rate policy.

He is also monitoring the risk of another eurozone banking crisis and its consequences for the Euro and EU membership. ‘China has enjoyed the benefits of a cheap currency while the US needs a cheap currency to help its economy,’ he said. ‘Meanwhile, Germany has kept its head down because its exports are booming due to the weak euro.’

Looking at the UK, he said Bank of England governor Mervyn King has talked at length about the benefits of cheap currency. ‘But he has said this in the past tense, so perhaps it is coming to an end,’ he added.

Over three years to the end of August, Fitzsimmons has posted a return of 22.98% on the Absolute Return Bond fund, against the benchmark Libor GBP 3 month return of 10.57% according to Lipper.