By Jenne Mannion The £103.5m Newton High Yield Bond Fund is increasing its exposure to higher yieldi...
By Jenne Mannion
The £103.5m Newton High Yield Bond Fund is increasing its exposure to higher yielding corporate bonds, particularly within continental Europe
The fund was launched in November 1997 and since that date has been managed by Helena Morrissey. At the end of its first month, the fund had around 5% in high yield issues, with five issuers represented. There is now 23% in high yield, spread between 20 issuers. The fund is invested predominantly in the UK market, however there is now a 10% allocation within continental Europe
She said that the increased exposure toward high yield bonds follows the availability of more attractive issues on the market
The low interest rate environment in Europe is putting pressure on the margins of major banks which is leading to less accessible bank finance. The result is more companies are turning to the high yield bond market to borrow money, acc-ording to Newton
Morrissey said: "I expect this trend of a high level of issuance to continue over the next three to five years as companies increasingly rely on raising money through bonds rather than turning to banks
"As more and more suitable issues become available, and if they meet our credit objectives, then the level of exposure to high yield bonds will increase. I wouldn't object to the high yield sector accounting for 40% of the portfolio by this time next year, providing the issues meet our criteria
Newton aims to reduce risk through its own credit specialist, Theresa Egan, who gives non-rated sub investment grade funds their own in-house rating
Risk is further controlled through diversification, with the portfolio holding around 100 issues and individual holdings unlikely to exceed 2.5
Morrissey aims for the portfolio to provide an overall yield spread over 10 year gilts in excess of 150 basis points while preserving or growing the capital
The latest addition to the portfolio, made in late September, was Weight Watchers, which now accounts for 1% of the fund. That recent purchase, worth e1.5m, matures in October 2009 and carries a 13% coupon
Morrissey added that alth-ough the outlook for corporate bonds over the next few months is generally positive, there are three potentially powerful forces which will influence that performance before the end of 2000
She said: "Firstly, most people in the market had been expecting lots of new issuance of European High Yield bonds in September and October, following the summer lull and ahead of the Millennium, when the markets are basically expected to be shut for new issues
"By contrast to what was expected, there are relatively few deals in the pipeline and at the same time a number of new funds are being launched and they need to invest the cash they receive, so there may be more money than bonds over the next couple of months, which is a positive factor on the prices of high yield issues"
The second main influence is the weakness in equity markets while the third is that spreads are likely to be wider than usual over the year end
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