UBS backs financials to provide value opportunities

by Adam Lewis

Simon Foster, capability manager for the UBS Corporate Bond UK Plus fund, says that six months on from its launch the fund is positioned to be overweight in bonds issued by financial companies. This is because the UBS fixed income team thinks the sector offers good value opportunities after recent weakness.

Foster (pictured) says the fund’s position in financials also reflects the team’s cautious stance on corporate credit.

Indeed, as the fund is able to make full use of the wider investment powers of Ucits III, Foster has gone a step further and used credit default swaps (CDSs) to short the iTraxx Crossover index, an index that is made up of some of the more risky European corporate bonds.

The objective of the fund is to achieve gross performance of 2% a year over that of the iBoxx sterling non-gilt index. Since its launch on March 6 the fund has returned 0.02% compared with a fall in value of 1.86% in the index. Over the same period the fund’s peer group, the IMA UK Other Bond sector, is down 2.52%, which ranks the UBS fund third out of 51 funds.

Foster says: “In the UK we are short of duration and particularly negative on the longer-dated bonds. However, inflation expectations priced into bond markets are generous at well over 3%, which is something we can capture by using inflation swaps. Overall the fund is positioned for yields to rise and we can do this by using derivatives.”

Foster says now is a good time to be investing in New Zealand bonds if currency risk is hedged, owing to the large amounts by which interest rates have risen in such a short time.

Being overweight in New Zealand bonds is a way of outperforming UK bonds in the short term, he says.

Foster adds that the fund does not constrain itself in any way in terms of the tools it uses. “There are lots of types of derivatives we can use to add value,” he says. “To date we have used interest rate swaps and CDSs, and even swaps on an index of loans in the US to profit from weakness in this market.”

By being able to make full use of derivatives under Ucits III, Foster says he can express his views on the names he likes and does not like. “They allow to you to put in ideas you never could before,” he says.