Spanish bonds in Pioneer Investments’ Euro Aggregate Bond portfolio reflects Tanguy Le Saout’s optimism for the eurozone.
The co-lead manager of the Euro Aggregate portfolio, Tanguy Le Saout, is buoyed by a eurozone that he says is working out its problems and showing signs of a recovery in the austerity-hit periphery.
The Euro Aggregate Bond portfolio invests in a variety of investment grade debt and debt sub-sectors denominated in euros – including peripheral Europe, corporates and currencies – to try and do something that no single fixed income market segment has achieved over the past ten years: outperform inflation.
The portfolio, which was launched in February 2008 and recently surpassed €1.5 billion of assets under management, has a long position in Spanish and Italian sovereign bonds.
The portfolio is – in Le Saout’s words – “risk on”.
Le Saout is Pioneer Investments’ head of European fixed income and co-leads the portfolio with Cosimo Marasciulo, head of government bonds and FX.
Among other recovery signs, he is encouraged by a turnaround in Spain’s fiscal deficit.
Approaching -10% in December 2012, Spain’s deficit is now forecast to shrink considerably in 2013, before becoming a small fiscal surplus by December 2014. Italy and France are also expected to reduce their deficits.
“The eurozone is moving in the right direction and there is more optimism now,” Le Saout says. “We are happy the Spanish deficit reduced in 2012 because further slippage was a real risk and could have led to a ratings downgrade by Moody’s.”
As well as long positions on Spain and Italy, the Euro Aggregate Bond portfolio is similarly positive on credit spread-duration. Le Saout explains that this means there should be better value in investment-grade corporate bonds compared with government bonds and expects the yield difference between the two sectors to compress.
GREAT ROTATION
The broad increase in optimism about the eurozone has seen a flood of money into equities recently, though Le Saout is cautious about what some call the “great rotation”.
“There is still plenty of cash on the sidelines yielding zero return, and if people want to put their cash to work, they will move first into fixed income, then out the yield curve or down the credit spectrum to increase risk, and only then will they start to re-invest in equities.”
The portfolio is designed to give the managers the ability to position it for virtually any environment, whether the great rotation occurs or not.
PERIPHERAL EXPOSURE
Organised along the lines of a “risk matrix”, individual investment professionals are responsible for their own alpha sources. Le Saout and Marasciulo give each head of sub-sector a risk budget and performance target. For example, the fund is currently targeting returns of 0.40% from sovereign spread exposure, 0.40% from credit-spread-duration exposure, and another 0.40% from Euro and US interest rate duration positions for 2013.
The troubled eurozone periphery has been one of the alpha sources in the past. Actively managing exposure to the periphery contributed 198 basis points to the portfolio’s gross return of 1.78% over its benchmark in 2011, and 216 basis points in 2012 to a gross return of 0.96% over its benchmark.
Important information: Unless otherwise stated all information contained in this document from Pioneer Investments and is as at 25 March 2013. Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Past performance is not indicative of and does not guarantee future results. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: 25 March 2013
