OPM Fund Management has introduced a US high-yield und and a gilt futures short into the OPM fixed interest fund.
The multi-manager wanted exposure to US high-yield corporate bonds in the portfolio because it sees value in this asset class. It has added the Allianz US high-yield fund, run by Doug Forsyth, to its fund of funds.
At about 2 per cent, default rates in the US are at record lows but OPM says the market is pricing in more defaults than are likely to occur.
It also thinks credit spreads – the extra rate of return that high-yield bonds provide to compensate investors for taking higher levels of risk relative to US Treasuries – are too wide, so investors are being more than compensated for the risk they are taking at a time when US companies are in good shape.
The multi-manager has also taken a small position in a UK gilt futures short from RBS, a 10-year mini gilt future, to protect against rising interest rates.
When interest rates rise, gilt prices tend to fall and their yields rise. Gilts with longer maturity dates lose more of their value than those with shorter dates when interest rates rise. Shorting this asset class will benefit the OPM fund and provide diversification if and when interest rates do increase.
OPM fund manager Ross Henderson says: “Over the next six months, gilt yields may go up from the current rate of 2.4 per cent to 3 per cent. That will hit our better quality investment-grade bonds. But if we lose money on this position, our other bonds should appreciate.”