Investors are being encouraged to look at high yield bonds on an industry level, rather than a curre...
Investors are being encouraged to look at high yield bonds on an industry level, rather than a currency or sectoral level, because telecoms stocks could prove a danger to the market.
Stephen Snowden, investment manager at Aegon Asset Management, says it is always prudent to include bonds in a diversified portfolio, even before the equity market goes down. He says: "For investors, to enter this market once the equity market has disappointed is a bit like locking the door once the horse has bolted."
As in 2000, high yield bonds had a good start to the year but have begun to drift off over the past month, says Snowden. High yield bond funds are still in the pre-embryonic stage and, although they have seen a fall in the past month, they should outperform gilts, he believes.
David North, associate director at Legal & General, says liquidity can present problems for high yield bond investors because the market is only a few years old, but there are some good deals to be had.
The sector has seen a few problems as high yield bonds have been dominated by telecoms companies. They did recover sharply at the start of this year, however, despite the European investment grade and telecom weakness, he says.
Snowden strongly recommends investors avoid telecoms, as the market is not forgiving to distressed stocks. He says that funds should be diversified out of telecoms and into other corporate bond stocks.
North has 70% of the Legal & General high yield bond fund invested in the US and only 15% invested in Europe and the UK. He says: "In Europe there is a strong demand for industrial assets and practically no supply. In the US, however, there is a large supply of defensive stocks such as in healthcare and media."
Snowden finds the European market weaker than the sterling, because 40% of the UK market is made up of telecoms compared with the 70% of the European market.
It is also advisable to be less country-specific because of the telecoms woes, according to Snowden. He would encourage investors to look for portfolios diversified by industry, rather than currency or sector.
Snowden favours Cathel Transmission, which owns mobile phone network transmission towers. He says: "With the recent difficulties in gaining planning permission for such towers, those which already have the space and a network are very valuable. Cathel also has a strong parent structure and is a beneficiary of capital expenditure rather than a victim."
He also cites HCA Healthcare as a favoured holding as it has managed to draw a line under its liabilities, despite having been in trouble, and is set to repay its financial strength.
North likes healthcare stocks because they have a value proposition and businesses for consolidating prescriptions in the US are doing well.
He says: "The economic environment also provides no barrier for healthcare companies, because people will continue to suffer illnesses and will pay for treatment."
North favours house building bonds, as they are interest rate sensitive and will benefit from rates coming down in the US.
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