Aberdeen Strategic Bond manager Luke Hickmore is looking for opportunities in peripheral Europe and the embattled oil and gas sector as he capitalises on market volatility.
It is a tricky time for bond markets across the board as investors panic about Greece’s status in the eurozone and fear the fallout from a looming interest rate rise by the US Federal Reserve.
However, the manager is holding his nerve and looking for unconventional places to find yield, including eurozone sovereign bonds.
“When you find bouts of volatility, that’s where opportunities lie,” he said.
“The European periphery is caught up in the Greece story, which is a chance to think about taking a long position in Spain and Italy now we are getting closer to a resolution.”
Mr Hickmore said he was also considering a return to high-yielding oil company bonds on the back of the sector’s share price weakness, a strategy that worked well for the fund at the end of 2014.
“Last year it was really tough to find these opportunities because the whole market shifted as one until the oil price and Greece hit,” he said.
“This is a good time to be hunting for bottom-up stock-picking opportunities and that is where we will be adding risk.”
When it comes to the timings of interest rate rises in developed economies, Mr Hickmore pointed out it was likely to be the US first, followed by the UK and then the eurozone.
He said he was using this forecast to help him decide on which longer-dated bonds to invest in.
Debt with a longer maturity usually pays a higher yield, but if a bond has a longer lifespan there is also the risk interest rates could rise during that time, something that erodes bond returns. Shorter-dated debt mitigates this risk.
“If Greece settles down, maybe Europe is a reasonable place to be taking duration risk,” he said.
“Where we have to be more cautious is in the US and the UK.”
The average length of US bonds held by the manager is just 0.8 years, a duration that may reduce further in light of the expected rate rise, he said.
Aberdeen chief executive Martin Gilbert revealed to the Financial Times last month the business had built up a $500m (£320m) credit line in case of redemptions for these very reasons.
“We need to be prepared if it gets ugly,” Mr Gilbert told the paper. “There may well be a dislocation in the bond markets where it is difficult to sell bonds and we need to ensure our funds have credit facilities in place.”
At £131m, Mr Hickmore said liquidity was not an issue for the Strategic Bond fund but acknowledged it could be for Aberdeen’s larger fixed income offerings.
