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US dollar fixed-interest managers stoic after third quarter of losses, says S&P

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Managers of US dollar fixed interest funds have put on a brave face following three consecutive quarters of losing money, according to the latest sector update from Standard & Poor’

Managers of US dollar fixed interest funds have put on a brave face following three consecutive quarters of losing money, according to the latest sector update from Standard & Poor’s Fund Services.

The median fund returned -4.3 per cent over the three months to the end of October 2008, after returns of -1.3 per cent and -0.4 per cent in the preceding two quarters.

This was in contrast to the Citibank US Government Bond Index, which was up 1.8 per cent in the three months to the end of October.

Irina Schoenberg, S&P Fund Services analyst, says: ‘The spectrum of returns in the latest quarter lies between low positive returns, such as 0.6 per cent for Allianz Pimco Bondselect UIS$ Fund (up 4.8 per cent YTD) to double-digit losses.’

The worst performer was the AllianceBernstein American Income Portfolio, which returned -16.5 per cent (-17.6 per cent YTD) due to a relatively high 37 per cent weighting in high yield and more than 30 per cent in emerging market debt.

Despite the gloom of the last nine months, many of the fund managers interviewed by S&P Fund Services are busy positioning themselves for what they expect are better days ahead.

Dan Fuss, who runs the Natixis International Funds I- Loomis Sayles Multisector Income Fund, calls the present time the best buying opportunity in investment grade corporate bonds he has seen in the 50 years he has been in the business.

Although he sees investment grade as likely to recover before high yield, he expects several more quarters of volatile credit markets. Fuss says that even with bonds trading at levels that discount defaults in excess of those experienced during the great depression, it seems unlikely that a bond portfolio will underperform intermediate US Treasuries in the medium term.

Fuss’s team at Natixis believes that defaults will rise to the ten per cent level in high yield but at current spreads of 1,600 over US treasuries, they feel that current prices/spreads in the high yield market have fully discounted a deep and protracted recession.

Kenneth Taubes of Pioneer Funds’ Strategic Income Fund says that high yield offers compelling value with spreads at all-time highs, effectively compensating investors for a 20 per cent default rate, as against the team’s 12-month forecast of six per cent and the 20-year high of 13 per cent in June 1991.

Taubes sees little value in treasuries, apart from TIPS, which currently price in an extremely low one per cent break-even rate, reflecting the expected rate of inflation. The fund is overweight corporates, with a 17 per cent near index weight in investment grade bonds.

Taubes has also increased exposure to the banking and finance industries, although still keeping them underweight and focusing on survivors.

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