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Where are the pockets of value in fixed income?
by James Phillipps on Oct 17, 2013 at 10:48
‘We compare the distribution of expected returns across the sectors and if the dispersion is high you know you are not confident or are assigning too much probability to extreme events,’ said Ugo Lancioni, fixed income manager and head of currency management.
‘Human characteristics often cause us to favour our own sectors or have a tendency to be over-confident in our estimates. This approach (the state space analysis) allows us to ensure we have a dispassionate starting point.’
The process has also helped the managers to identify a number of currency plays. These include taking advantage of a recent sell-off in the Norwegian krone to build a long position.
The fund is also long the US dollar on the notion that the tapering of quantitative easing, although delayed, will ultimately be positive for the greenback.
‘When the Federal Reserve started talking about tapering in May, the market reacted strongly and a lot of exposures were liquidated,’ Lancioni said.
‘It turned into a very technical market over the summer, which provided a great environment for relative value managers to exploit dislocations.’
Indeed, despite the tapering talk, the four major central banks – the Federal Reserve, European Central Bank, Bank of Japan and the Bank of England – have continued to expand their balance sheets, which has been supportive of risk assets.
He said the market reaction to the shutdown of government in the US has been muted and indicative of the resilience of fixed income as an asset class.
‘The market has almost chosen to ignore the government shutdown,’ Jonsson said.
‘We are hoping we won’t just get a temporary short-term solution, we would prefer to see a longer-term plan put in place.’
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