(Reuters) - Fixed income fund manager Ford O'Neil, who oversees Fidelity's $29.7 billion Total Bond fund, has reduced the fund's investments in high-yield, emerging market and corporate bonds, according to a report from Barron's.
O'Neil is cutting back the fund's exposure to risky assets overall, reducing his position across virtually every fixed-income category and adding exposure to U.S. Treasury bonds. Treasuries now make up 32 percent of assets, more than double what it was a year ago, according to Barron's.
“The risk assets we purchased are priced for perfection,” he said in the report. “There isn’t a lot of value and very little margin for error.”
He has also increased his exposure to inflation-protected Treasuries, bringing the fund's position in TIPS to more than 6 percent of total assets, with a focus on intermediate and longer-term bonds.
Ford believes interest rates are likely to rise modestly as inflation edges up, but strong demand for fixed income from retiring baby boomers and overseas investors should have a stabilizing effect.
Despite disappointing numbers recently he expects wage growth to pick up soon, driving inflation.
“If we’re right, there is going to be a larger total return for those [longer duration] securities,” he says. The fund’s overall duration, recently 5.4 years, is slightly less than the Bloomberg Barclays (LON:BARC) U.S. Aggregate.
The report also noted that O'Neil has been adding to handpicked names in the energy space in both investment grade and high yield, including Anadarko Petroleum (N:APC) and emerging market plays including Brazil's state-controlled oil company Petrobras (SA:PETR4) and Mexico's state oil company Pemex .
However, the fund has reduced its high-yield and emerging market ownership to just 7.3 percent and 4.6 percent, respectively. It has also trimmed some 10 percentage points from its corporate investment-grade position to 23.3 percent of assets and cut agency mortgage-backed securities to 18 percent of assets, compared to more than 28 percent for the benchmark.