LeggMason Investors is bullish on the outlook for UK corporate bonds in the belief that the low infl...
LeggMason Investors is bullish on the outlook for UK corporate bonds in the belief that the low inflation and low interest rate environment is set to continue.
Chris White, director at Legg- Mason Investors and manager of the group's Monthly Income and UK Income unit trusts, believes the current environment will favour corporate bonds, as bond markets do not react well to sustained pick-ups in inflation.
White says: 'This could favour bonds on a risk-return ratio compared with equities. If you think stock market returns are going to be lower than they have been in the past, then bonds will look better on a risk/return basis.'
White also notes that a number of corporate pension funds are increasing their exposure to bonds in the wake of the accountancy standard FRS17, under which companies must include their pension fund liabilities on balance sheets.
Among firms that have raised their exposure recently are Balfour Beatty, which increased the bond allocation of its pension fund to 50% from 47% and AstraZeneca, which increased the share of bonds in its company pension fund to 60% from 50%. In terms of corporate bond holdings, White says LeggMason Investors is looking to shift from more defensive areas of the market, such as utilities and non-cyclical consumer goods, and move into more economically sensitive areas, such as cyclical services and industrials.
Investec Asset Management favours higher yielding UK corporate bonds, as it sees value in this part of the market and believes yields are attractive.
Michael Markham, fund manager for credit and high yield at the group, points out that corporate bonds from companies such as Gala Group, the UK bingo and casino operator, are offering reasonably attractive yields. Gala's bonds are B-rated and are offering a yield of about 10%. Markham says that other higher yielding groups include BSkyB, which is BB-rated and has corporate bonds offering a yield of about 7.8%.
Markham says: 'We are more constructive on the sterling high yield market ' although we are not saying that there are not going to be defaults. The telecoms sector has been under pressure and it is likely that there will be restructuring there. We are being compensated for the potential for defaults going forward in the level of yields.'
Markham also points out that United Biscuits is offering a yield of about 9% on its corporate bonds, which have a rating of B2.
White says: 'The most attractive area of the corporate bond market is the BBB and A-rated area ' there is a better combination of return for the risk that you are taking with the bottom end of the investment grade market. We have been buying issues such as Rio Tinto and Woolworth. Most of the FTSE 100 companies have their corporate bonds rated at A and BBB, which just goes to show that there is a lot of quality down at the bottom end of the investment grade spectrum.'
Rio Tinto corporate bonds have a gross redemption yield of about 5.76%, while Woolworth corporate bonds are yielding around 6.3%. Markham says the investment grade market is being supported by more institutional demand. He adds that the outlook for corporate bonds has also been helped by the Monetary Policy Committee of the Bank of England, as it has been successful in meeting its inflation target.
LeggMason positive on corporate bond outlook.
Low interest rate and inflation to continue.
Investec favouring high yield debt.
Concerns over the possibility of defaults.
Inflation pick-up would nit corporate bonds.
LeggMason moving away from defensives.
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