Don’t be afraid of Europe's banks, says PIMCO’s Amey

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PIMCO’s Mike Amey is prioritising senior secured bank debt as he seeks to take advantage of supportive central bank policies for the financial sector in both the UK and Europe as a whole.

The Citywire A-rated manager said he has adopted a significant overweight towards senior bank debt, which is largely drawn from the UK banking and brokerage sectors.

‘One thing we have looked at more and more is senior secured bank debt. Because if that goes badly wrong, the one thing Mervyn King and other central bankers have said is that the ones taking the hit are further down the capital structure.’

‘That’s not to say the senior secured debt doesn’t have risks, because it does, but we are buying off the back of the fact banks are fairly well recapitalised in the UK.’

Amey has 27% of his £56.4 million (€65.2 million) PIMCO Select UK Income fund invested in banks and brokerage as of the end of February 2013.

This compares to a 7.5% allocation in the Dublin-domiciled fund’s benchmark, the Barclays Sterling Aggregate 1-10 Year Bond Index.

Peripheral exposure

Not all of this position is concentrated on the UK, as Amey said he has also opted for senior secured debt in banks on Europe’s periphery. He currently has between 3-5% of the fund allocated to banks in Spain and Italy.

‘We are buying Spanish and Italian bonds because there is extra upside relative to what we can see in other domestic bond markets.'

'You can get a decent yield if you buy a Spanish bank, for example, because the ECB has done a much better job at helping the banking system than pushing investors into sovereign debt.'

‘We have seen that in Draghi’s ‘whatever it takes’ announcement and also in the acronym-heavy measures to help the market, be that LTRO I or LTRO II or, more recently, the introduction of OMT.’

While Amey insisted the fund was not a ‘peripheral bond’ strategy, he did state this option to invest up to one-third of the fund outside of the UK create yield-generating opportunities.

ABS

Exposure to both mortgage-backed securities (ABS) – both residential and commercial – make up 31% of the fund’s exposure by asset type at present and Amey said this area of the market offered strong upside potential with a slight liquidity premium.

‘ABS is effectively very strong and we still have some in the portfolio, although we have let some mature. There is some big extra upside in holding these for what is, frankly, quite low risk,’ he said.

‘If you look at where there is a big yield difference relative to the credit quality, then ABS and financials are the two areas where you can find high credit quality also and a strong yield. So you are actually getting quite a lot for some excess credit risk.’

The PIMCO Select UK Income Bond fund has returned 14.79% over the past 12 months in pound sterling terms. This compares to its Citywire benchmark, the Citigroup United Kingdom WGBI TR, which rose 2.63% over the same period.