Don’t get distracted by “noise”, warns F&C Strategic Bond duo

Last month saw volatility creep back in to global asset markets, leading to sharp falls in equities and widening credit spreads, paralysing the markets once more.

However, Fatima Luis and Rebecca Seabrook, co-managers of the F&C Strategic Bond Fund, believe the wider market is being distracted by a bleak macro picture and tainting stocks which may not necessarily be at risk.

Speaking at a press briefing in London yesterday, Luis commented: "The sharp rise in equity markets in the second half of 2009 gave investors false hope that there would be a return to "normality". However, the recent surge in volatility across the markets and asset classes, exacerbated by concerns over Government indebtedness, has subsequently impacted all sectors and hurt relatively healthy areas of the credit market, rather than a significant change in headline risk being the root cause."

Luis feels that investors are currently over-focussed on headline risk and should shift their focus to ground level. "GDP and other economic indicators have surprised on the upside and the feared widespread bond defaults have so far not materialised, so coupons are not at risk in our view.  All the noise over the last few weeks has blinded the market to the reality that good opportunities remain," she explained.

From Luis and Seabrook's perspective, some out of favour European regions continue to offer great individual stock prospects. For example, Spain is often overlooked due to ongoing political, social and economic issues and its high level of public debt.  The managers believe that there are some good names in the region, such as BBVA and Santander, which remain strong companies on a fundamental level and fit their current bias towards companies with a large emerging markets exposure.

This reflects Luis and Seabrook's bottom-up stockpicking approach in the F&C Strategic Bond Fund, a strategy they believe will steer the fund through the latest wave of volatility whilst negative macro news and risk weighs heavily on the market.

Co-Manager Rebecca Seabrook commented: "Year to date, returns across different types of bonds have been strongly correlated with the biggest differentiator being where the issuer is domiciled. This reflects views on the strength of those countries' national balance sheets. This is also true at a corporate level and the water is being muddied whilst concern over weaker names is being unfairly transposed on to underlying credits of stronger companies. We believe this is where we can currently add the most value. Rather than making a strategic call on different asset classes within credit, which we have the flexibility to do, we feel now is the right time in the cycle to adopt a primarily bottom-up perspective, selecting investments by characteristics and name."

The F&C Strategic Bond Fund is one of a handful of corporate bond funds that has a brief to roam across the entire credit spectrum - from investment grade to ‘high yield' - depending on where the best opportunities arise.

"The weak euro works in the favour of large European issuers exposed to the rest of the world. We are currently focussed on identifying companies with international exposure to areas such as the US and emerging markets, avoiding purely European domestic players. Businesses with more than 50% exposure outside of Europe, such as Heidelberg, Codere and Rhodia, should benefit from the weak euro, as well as looking cheap alongside similar companies with a purely domestic exposure," Seabrook concluded.