Fund Management

Cazenove Sees Bond, European Currency Rich Pickings

Rachel Walsh, 27 February 2009

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Cazenove Capital Management, the London-based asset managers advise pragmatism and vigilance for what will be an unpleasant market recovery.

“We have nothing to fear but lack of fear itself,” said David Docherty, head of the Cazenove UK Growth and Income Fund at a conference on Thursday, “complacency is what caused the financial crisis.”

Cazenove’s Strategic Bond fund manager Peter Harvey said there are opportunities in corporate bonds and securities, so long as they are at the riskier end of the market.

The yield spread between corporate bonds and US Treasuries is currently at 6 per cent, a level not seen since 1929, he said. According to Mr Harvey, this yield, over five years, means an investor can afford to default on one third of their portfolios and still obtain a superior return to government bonds.

BBB bonds are fully discounting a hard recession, 14.5 per cent of Cazenove's portfolio is in this area, he said. BB bonds comprise 31.1 of the fund. Mr Harvey said they are the defensive part of high yield fixed interest.

Overall, his portfolio remains defensive as there is continued uncertainty on cash flow, and he is currently adding to consumer non-cyclicals such as tobacco, beverages and pharmaceuticals.

Chris Rice, the firm’s European Fund manager has been investing in well-capitalised banks such as BNP, Credit Agricole and SocGen. He said he is still underweight financials compared to the index, but is probably overweight compared with the peer group.

For parts of the portfolio, he is sticking to well-capitalised defensives sectors with high yields and earnings in areas such as pharmaceuticals, telecoms and food. He is also underweight on infrastructure because of the capital expenditure boom, which has led to oversupply and unsustainable earnings.

He said financials will be key this year; the market cannot rally until banks stop falling. "There will not be a sustainable market bottom until this happens,” he said. 

Mr Rice also warned that fund managers in
Europe need to focus on currencies. He said: “Assuming that the euro will remain, you have to be underweight
Portugal,
Greece,
Ireland and

Spain. I expect these countries to have a 'lost decade,' like

Japan.”

Cazenove’s Absolute Target fund manager Tim Russell, meanwhile, said that it was worth paying a little bit more for financial stocks in institutions the government has not bailed out. Mr Russell said government intervention is making stock picking increasingly difficult for fund managers.

“It is worth paying a little bit more for stock which escaped the government’s clutches,” he said. 

But he warns against investing in other banks which he says may halve in value. Mr Russell said the positioning on his fund, which launched last July, remains unchanged.

Mr Docherty manages the firms Growth and Income fund and is overweight on defensives and underweight on cyclicals. He noted this stance helped fund performance in 2008.

“Defensives have been the safe haven. We do not want to be complacent about defensives and overpay for earnings resilience. But we think we remain overweight on absolute valuations for defensives,” Mr Docherty said.

He also said he is looking at sustainable franchises in the retail sector as he thinks they will have a “good recession”.

Cazenove Capital Management ended last year with assets under management of £10.9 billion ($15.5 billion). 

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