CYPRUS - The management committee of the Hotel Employees Provident Fund in Cyprus has made a tactical decision to alter the composition of its bond allocation.

The fund will now exclude government bonds from its allocation to global bonds and invest part of the portfolio in global credit funds.

Further, "in the interest of diversification and capital preservation", the fund will now invest part of the bond exposure in absolute return bond funds, aiming to achieve returns of 3-4% above Euribor, with minimal volatility.

The management committee has selected PIMCO for the global credit allocation, and GAM, Insight and PIMCO for the absolute return bond fund allocation.

Marinos Gialeli, chief executive at the scheme, said the committee had been "nervous" about the fortunes of government bonds in such a low-yield environment for some time.

"Continuing to buy at these low yields is not advisable for all but the worst economic scenarios," he said.

Gialeli said high spreads on credit bonds - beyond what was reasonable for the risk of high-quality credit bonds - supported the idea of investing in global credit for the last 18 or so months, as the reduction in credit spreads would more than compensate for the reduction in yields.

"However," he added, "the recent reduction in credit spreads is making credit portfolios more vulnerable to yield rises.

"The committee recognises that spreads have narrowed significantly, resulting in the likelihood of lower potential returns for undiminished levels of risk.

"With this in mind, absolute return bond funds offer an attractive return for risk compared with cash, corporate bonds and government bonds."

Gialeli said the absolute return bond funds would target returns that offered the same 3-5% yield levels of many corporate bond benchmarks, but with 2-3% lower levels of absolute volatility in returns.

He added: "We also believe that [these funds] provide diversification in the portfolio, as they show lower correlation with other asset classes, including bonds."

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