Citywire AA-rated manager Steven O’Hanlon has financial bonds to nearly one-quarter of his total exposure in order to capitalise on de-leveraging in the sector.
Speaking to Citywire Global, the London-based manager, who is head of fixed income at ACPI Investments, said he undertook a significant increase thanks, in part, to a more solid regulatory framework.This saw financial bonds exposure in the ACPI Global Fixed Income UCITS A USD fund rise from 17% to 24% over the past four months.
‘We own Lloyds Banking Group because it's a safe bet and its investment banking business is limited. We like the insurance company Prudential, which boasts a good cash flow and is solid from a credit perspective,’ O’Hanlon said.
‘Again in the insurance sector, we favour RSA Insurance Group, which is more an opportunistic trade as the company’s debt is cheap,’ he added.
O’Hanlon, who believes that banks will be in a much better position in ten years time, holds 4.3% of RSA, 3.6% of Prudential and 3.2% of Lloyds, according to the latest factsheet.
The US flattening curve
Elsewhere in the fund, which he has run since 2006, O'Hanlon is paying very close attention to the US yield curve. This has seen him adjust his positioning here in order to keep step with monetary policy announcements by the Federal Reserve.
‘We have been adding some duration exposure to the fund through government bonds since the beginning of the year. We think that the US yield curve will flatten considerably. We also expect some volatility with QE coming to an end,’ he said.
The fund holds a 10.7% of US treasuries, which O'Hanlon views as ‘cheap, easy and liquid’ at the current time.
O’Hanlon, who think that the new India’s government may provide stability and growth, said he may also up his exposure to Indian sovereign bonds. However, the manager, who also runs an Indian bond fund, said this depends on how the country's August budget turns out.
‘Indian government bonds have a strong upside potential but we want to wait until the next budget to decide wheter to increase or not our 8% holdings,’ he said. ‘I am not sure that cyclicals will be the winners of these elections. Investment in India won’t materialize until the government will overhaul the banking system and reduce the fiscal deficit.’
‘Generally speaking, I am not very nervous on emerging markets from a valuation perspective and I back those with a reform agenda, like India,’ he added.
A new global crisis
While the bulk of his financial exposure is drawn from the UK, O’Hanlon doesn’t own any core European sovereign bonds in the ACPI Global Fixed Income UCITS A USD fund. This is because he thinks the level of growth in the region is too weak to sustain the countries' sovereign debts.
‘My question is: where is growth coming from? How will we sustain these debt levels? There are huge structural problems to be tackled in the region. The outcome of the latest European elections points towards a less integrated union,’ he said.
‘Markets want QE to stimulate growth but QE hasn’t solved many problems in the world. It is actually a way to kick the can. QE has reflated assets, it hasn’t reflated the economy,’ he added.
‘In 2008, governments stepped in to bail out bankrupt banks. Now, governments themselves are bankrupt. The next one will be a central banks’ crisis, with no one able to rescue the system,’ he said.
Over the three year period to the end of April 2014, O’Hanlon returned 10.98%. This is 7.58 percentage points more than the average manager in the Bonds - Global sector.