It's the right time to reduce beta exposure, as credit spreads are trading very close to their 2007 levels.
That's according to Oliver Collins, a portfolio manager at ENISO Partners, who said that before the next ECB meeting in October credit spreads could widen in response to heavy issuance, the German election results and US policy.
‘In terms of trimming beta exposure, we have reduced or sold Telecom Italia 2025’s (XS1497606365), which have been one of the best performers year-to-date in the high yield index.’
The portfolio manager added that this position will be increased if spreads widen on the back of the company’s improving credit characteristics and a potential return to investment grade in 2018.
Another position that the firm sold was Schaeffler Finance 2025 (XS1212470972), as a result of the company’s move from high yield to investment grade.
Collins added that for low investment grade credit, Schaeffler Finance is valued fairly now.
Keeping an eye on issuance
In the meantime, the portfolio manager remains constructive on short-dated corporate hybrids and AT1s, which would be cushioned if interest rates deliver any surprises.
The fund manager also noted that primary market issuance picked up in September following the summer lull.
Collins said the total issuance for corporates and financials was €12 billion in August, making it the second best year on record.
However, the asset manager expects a much heavier issuance of around €40 billion in September, which could put pressure on spreads.
‘This month we participated in Julius Baer’s inaugural 4.75% USD AT1 (XS1679216801). Guidance was 5.5% for $300 million issue price talk but this was tightened to 4.75% at issue, seeing that books were covered a mammoth 30x.’