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Greek default and deleveraging of greater concern than inflation says RWC Partners

Tuesday, May 17, 2011
Opalesque Industry Update - RWC Partners’ Head of Absolute Return Bond Strategies, Peter Allwright, believes that investors should be far more concerned about the effects of the “re-profiling” of Greek debt than the inflation numbers.

Although UK inflation has again surprised on the upside the consequences for economic growth from the unwinding of key European countries will have much greater consequences than inflation. Allwright highlights government bonds as the only asset class that are visibly pricing in default risk against Greece. This leaves other risk assets significantly exposed should Greece restructure its debt. Spain, Portugal and Ireland would also be clearly vulnerable to default, a situation that would certainly lead to further deleveraging.

Allwright is particularly focused on the deleveraging impact of Greece as European banks are forced to write down the value of Sovereign debt causing them to reign in lending. Although it is not his core scenario Allwright believes that investors are understandably focused on inflation however they should be aware of the possible deflationary impact of a European sovereign debt re-pricing.

Within their portfolios Allwright and his co-Head Stuart Frost remain liquid and flexible to ensure they can protect capital and make money as the situation develops. Their funds have a flexible mandate that allows Allwright and Frost to position their portfolios to make money even in periods of extreme stress such as sovereign debt crises.

Commenting, Peter Allwright, Head of Absolute Return Bond Strategies at RWC Partners, said:

“Of most concern to me is that investors are too complacent about the risk of contagion and default in the European bond markets. The fact that government bonds are clearly pricing in default and re-profiling to a greater extent than any other asset means someone is wrong and is going to get burnt.

“Our concern is that market performance in 2011 may start to resemble that of 2008 where an initial inflation spike was followed by a sustained period of risk aversion and accelerated deleveraging.

“Our job is to remain liquid and to make our investors returns whatever is happening in the financial markets. We remain aware of the risk of prolonged inflation but equally are aware that the sovereign issues in Europe could accelerate the post-Lehman deleveraging.”

Allwright and Frost joined RWC Partners in October 2010 from Threadneedle where they were the joint portfolio managers of the Threadneedle Target Return Fund, Absolute Return Bond Fund and the hedge fund, Macro Crescendo Trading Fund.

Allwright and Frost’s approach involves core allocations to short duration, high-grade fixed income securities, supplemented by alpha strategies that take advantage of investment opportunities in the fixed income and currency markets. These alpha strategies are able to take long and short duration positions in the bond markets allowing the overall strategy to make positive returns through the market cycle, including periods of financial stress and uncertainty.

The RWC Enhanced ARC Fund and the RWC Cautious ARC Funds are UCITS III funds with daily dealing aiming for returns of cash +6% and cash +3% respectively.

(press release)

About RWC Partners
RWC Partners is an independent investment firm founded in 2000. The group provides high-alpha asset management to institutions, professional investors and intermediaries. RWC manages a range of UCITS III funds as well as offshore funds and institutional mandates.

The business is built around highly-talented portfolio managers with an intense focus on performance and a strong risk management culture. RWC Partners is independently managed and controlled. The majority of the firm’s equity is owned by portfolio managers, directors and other employees. Schroders own minority stake in RWC Partners.

RWC's investment teams comprise many of the asset management industry’s most respected names in long only and absolute return investing.

RWC's seven investment teams include:

Nick Purves and Ian Lance - Equity Income and Value
Ajay Gambhir - European Equities
Priya Kodeeswaran - Global Growth Equities
Mike Corcell - US Equities
John Innes - UK Equities
Davide Basile - Global Convertible Bonds
Peter Allwright and Stuart Frost - Absolute Return Bond & Currencies

For further information, visit RWC Partners at

- FG

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