The enduring ability of high-quality sovereign bonds to offer diversification and capital protection has ‘disappeared’, according to Nordea’s Asbjørn Trolle Hansen.
Speaking at the Fonds ’14 Conference in Zurich, the Citywire A-rated manager said he has been forced to reassess and reallocate his sovereign debt exposure to other areas.
Hansen, who co-runs the €834 million Nordea 1 – Stable Return fund, said areas long associated with aiding investors during times of crisis no longer served that function.
‘The biggest change for us over the past few years has been the changing role of AAA-rated bonds. They were the key diversifier but that function has now changed,’ he said.
‘It used to be government bonds, most notably German bunds, would be the diversifier, but we have lost that asset class because yields have now become so low. That ability which made it so attractive has disappeared.’
This has seen Hansen look to different parts of the fixed income market, which has drawn him to the US bond market in particular over the past year and a half.
‘One change we did make was to look at the middle to longer end of the US curve when we saw the market coming back to life. This saw us take some positions in the seven-10 year curve, while also looking at some shorting in the two-year parts.'
Elsewhere, Hansen has also been upping exposure to the equity markets, with a strong emphasis on the parts of the market with low volatility and low correlation to other markets.
‘You need to look at how you can provide capital protection because that is not happening in government bonds. We need to look at different ways of doing that and I don’t mean AA-rated bonds because they have the same problem.
‘We are looking at low volatility, high quality stocks or bonds with a similar set-up in the credit sector. Essentially we are looking for methods of providing capital protection which reduces the government bonds, which used to be a reliable asset class.’
At present, the fund is 45% invested in global equity markets, which the fund manager deems ‘stable’ markets, while 27% is in Danish mortgage bonds, 10% in European covered bonds and 4% is allocated to US Treasuries.
The Nordea 1 – Stable Return BP EUR has returned 17.6% over the three years to the end of December 2013. This average manager in the Mixed Assets – Absolute Return Sector returned 6.78% over the same timeframe.