UK managers increasing appetite for corporate credit risk – S&P report

S&P’s latest UK fixed income sector report suggests that managers are taking advantage of valuations to increase exposure to credit risk.

“Widening credit spreads reflect the increased economic risks, although there is no consensus on whether Western economies are simply experiencing a mid-cycle blip or a serious downturn. Current valuations are generally regarded as attractive longer-term buying opportunity as managers predicted continued sub-par growth rather than a double-dip recession,”said S&P fund analyst Kate Hollis.

Managers remain cautious, but there is some tactical allocation to invest cash in corporate credit risk. The cash had built up as managers anticipated more short-term volatiilty because of eurozone debt problems.

Invesco Perpetual is one of those managers who reduced cash earlier than others, S&P reports.

Paul Causer and Paul Read, who run the S&P AA rated Invesco Perpetual Fixed Interest Investment Series Tactical Bond Fund, let cash build up to over 30% of the fund early in 2011 and recently invested much of it in Spanish, Italian and French risk, using cash bonds and CDS.

However, other managers have retained high cash levels. Fidelity’s Ian Spreadbury held 12% in cash and 25% government/supranational bonds in the S&P AA rated Fidelity Investment Funds – Strategic Bond Fund. Reasons cited for retaining the cash include a potential double-dip recession, and delays to a sustainable solution to European and US sovereign debt problems.

“John Patullo and Jenna Barnard run their Henderson Strategic Bond Fund with around 15% cash currently as they too are worried about the lack of economic growth and eurozone politics,” Hollis said.

Other managers mentioned in the report include M&G’s Richard Woolnough – said to be underweight financials because he believes that banks in the UK and Europe are in a structural bear market because of their inability to fund loan growth – and Andrew Sutherland of Standard Life Investments – said to believe that senior and Lower Tier 2 financials remain “the sweet spot within investment grade credit.”

“Ian Pizer from Standard Life sees the Bank of England happily sitting on the fence and negative real gilt yields for many years,” the report states.

 

Ratings summary
UK fixed income funds
A
Invesco Funds – Invesco UK Investment Grade Bond Fund
Standard Life Investment Funds – AAA Income Fund
 
UK gilt funds
AAA
M&G Investment Funds – Gilt & Fixed Interest Fund
 
AA
Standard Life Investment Funds – UK Gilt Fund
 
NR
Invesco Funds Series 2 – Gilt Fund
 
Sterling corporate bond funds
AAA
Fidelity Investment Funds – MoneyBuilder Income Fund
M&G Investment Funds – Corporate Bond Fund
M&G Investment Funds – Strategic Corporate Bond Fund
 
AA
Fidelity Investment Funds – Extra Income Fund
Invesco Funds Series 6 – Sterling Bond Fund
Invesco Perpetual Fixed Interest Investment Series – Corporate Bond Fund
Legal & General Fixed Interest Trust
Legal & General Managed Monthly Income Trust
 
A
Aviva Investors Investment Funds – Aviva Investors Corporate Bond Fund
BlackRock Corporate Bond Fund
Standard Life Investment Funds – Corporate Bond Fund
Standard Life Investment Funds – Select Income Fund
Standard Life Investment Funds – UK Ethical Corporate Bond Fund
Threadneedle Investment Funds – UK Corporate Bond Fund
 
UR
LV= UK Corporate Bond Fund
Old Mutual Corporate Bond Fund
 
Sterling strategic bond funds
AAA
Legal & General Dynamic Bond Trust
M&G Investment Funds – Optimal Income Fund
 
AA
Fidelity Investment Funds – Strategic Bond Fund
Henderson UK & Europe Funds – Strategic Bond Fund
Invesco Perpetual Fixed Interest Investment Series – Tactical Bond Fund
 
A
Aviva Investors Strategic Bond Fund
EFA OPM Fixed Interest Fund
 
TR
Standard Life Investment Funds – Strategic Bond Fund

 

ABOUT THE AUTHOR
Jonathan Boyd
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