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AAA-rated bond manager reveals her top overweight sector

AAA-rated bond manager reveals her top overweight sector

Lower-rated corporate debt in Europe could offer investors huge opportunities as companies are being more cautious in managing their money.

That is the view of Henrietta Pacquement, who manages the ECM Short Duration Credit fund.

The Citywire AAA-rated manager currently has 60.69% of the fund invested in BBB/Baa rated credit, compared to the benchmark position of 33.84%.

'Corporates in Europe haven't quite shown the same animal spirits that we have seen in the US,' she told Citywire Selector.

'Credit metrics remain pretty solid, there is still a focus on cost control and cash flow generation. M&A activity has been picking up, but it remains on the whole conservatively financed.'

‘BBB-rated companies have been a bit more cautious about their balance sheets and they have been looking to reduce leverage, lower gross debt and they have been seeing their earnings improve.

'Meanwhile, A-rated companies have increased leverage a bit more and M&A has been taking place in this ratings band. They have also been looking at share buybacks and dividend increases.'

Lower growth

One area Pacquement has cut back on in the fund is the allocation to corporates headquartered in Britain.

The UK was the largest geographical allocation in the fund at 19.74% at the end of November 2016, but Pacquement reduced it to 16.68% by the end of January 2017.

Meanwhile, sterling-denominated debt made up 9.25% of the fund at the end of 2015 which was reduced to 7.9% before the UK voted to leave the EU. It was cut to 4.5% over worries about the quality of economic growth which could fluctuate due to consumer sentiment.

'My feeling is that some of this consumption growth is going to be driven by tourists coming to benefit from the weaker sterling, as well as consumers potentially bringing forward consumption ahead of currency driven inflation that, we believe, is around the corner,’ Pacquement said.

‘The remainder of our UK exposure is relatively short dated in nature and focused on international names that benefit from weaker exchange rate risk. We are underweight cyclical sectors and UK retail, preferring such sectors as transport and services.'

Elsewhere in Europe, Pacquement said the European Central Bank’s bond-buying programme is going well and it will end up holding around €80 billion to prevent volatility in the market.

'If you look back to the start of the buying programme, people were very sceptical about it and about the ECB's ability to buy, as well as whether it would really make a meaningful investment in the European corporate market.

'There was a bit of a dip in December but they have overcompensated for that in January this year. The euro-denominated credit market is around €2 trillion, so the ECB is only holding 3% of the market.'

Over three years to the end of January 2017, the ECM Short Duration Credit fund returned 7.02% in euro terms. This compares to a rise of 4.12% by its Citywire-assigned benchmark, the Markit iBoxx Euro Corporates 1 -3 Year TR, over the same time frame.

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