A global fixed-income manager who relies on quantitative analysis, Andy Weir admits that he also uses a sizeable dollop of experience to shape the bond portfolios he manages for Fidelity Investments International in London, England. And given the nervous state of fixed income markets, he is seeking to minimize risk while maximizing opportunities.
For starters, he does not take active country positions. "The world is complicated enough just looking at the yield curve," says Weir, 41, group leader, bonds, fixed income, and manager ofFidelity Global Bond Currency Neutral Series A andFidelity Global Bond Series A.
"Our overriding philosophy is that we have lots of diversification, but only add risk where we have insight," Weir adds. "There is no point taking a position if you're not adding some insight."
In building the portfolio, Weir uses a mix of sovereign and corporate credits, interest rate positioning, sector and quality allocation, and individual securities selection within certain sectors. Sovereign bond holdings are limited to about 7%, although corporate bond positions are much smaller, limited to 0.20%.
While Weir favoured sovereign credits and underweighted investment-grade corporate credits most of last year, his quantitative models recently prompted him to increase the corporate exposure. Credit spreads are almost 500 basis points above government treasuries, levels not seen since the 1930s Depression, he says.
Corporate bonds have been extremely volatile as risk premiums shot up, and diversification did not help investors. "Many people underestimated the volatility of the move," Weir observes. Corporate credits account for about 50% of the benchmark Lehman Brothers Global Aggregate Bond Index.
Yet Weir argues that the current environment represents an excellent buying opportunity, since most of the spread widening has occurred to compensate for a lack of liquidity. "If you are a long-term investor, this is the time to buy corporate credits," says Weir. "You will get paid a huge amount to buy and hold credits." One prime example is BAT PLC, whose bonds are yielding 600 basis points over UK treasuries.
Weir argues that a turnaround is at hand, based on several positive indicators. "We are starting to see 'green shoots'. Money is flowing in," he says, noting that institutional clients have been moving into the global bond asset class.
In addition, the Chicago Board Options Exchange Volatility Index, and the so-called TED Spread (the difference between interest rates on interbank loans and U.S. treasuries) have dropped significantly. As well, many new corporate bond issues have been over-subscribed. "This gives you a clear insight," says Weir. "The fact we had a lot of demand is a very positive sign."
A Manchester, England native, Weir has been in the investment industry since 1992. He had intended to go into the semiconductor field, after he earned a bachelor of engineering at University of Nottingham in 1988. Weir also attended Oxford University, where he worked on a PhD thesis on numerical analysis of semiconductor devices, although he did not complete it.
Since there were few jobs in his intended area, Weir looked for other opportunities to use his mathematical skills. In 1992, he was hired as a fixed-income analyst at JP Morgan Investment Management.
In 1997, Weir joined Fidelity and quickly built up a four-person research team. He was promoted to director of quantitative research in 2002, and became a portfolio manager in December 2003. He is responsible for about US$6 billion in assets.
Weir has managed Fidelity Global Bond Currency Neutral since April 2007. The fund has performed in the fourth quartile in the past year, since it had no exposure to rising foreign currencies. Its loss of 3.2% for the 12 months ended Dec. 31 compares unfavourably with the positive 17.4% for the median fund in the Global Fixed Income category.
However, Fidelity Global Bond fared much better, as a result of foreign currency appreciation. The fund returned 18.5% in 2008, putting it in the second quartile.
Besides adding to the corporate credits (though this position is still underweight relative to the index) Weir has also picked up inflation-linked bonds. In his analysis, the market has been overly pessimistic and pricing in negative inflation for the next five years. "The market is not using fundamentals to price the bonds. You want to own inflation-linked bonds because they are particularly cheap at the moment."
While Weir depends on quantitative models, he's learned from the past year's turbulence that qualitative analysis also has a key role to play.
"Models do help. But you have to know how to work with them. Sometimes, the data is not relevant to the current environment," he says, adding that the models had never previously dealt with such massive liquidity problems. "Learn from what's going on. Don't blindly follow."
Consequently, he puts a lot of faith in his own experience and his team's judgment. "They bring rationality to the conversation."
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