Putnam Investment's European high-yield team is looking to single-B credits as a destination for funds from new continental mandates. The move up the credit spectrum is driven by the political and economic risk posed by higher interest rates, global terrorism and surging oil prices, according to Anton Simon, managing director and senior portfolio manager in London. Putnam manages and oversees nearly $1 billion in European high-yield credits.
"In the last two weeks, the increase in fears surrounding the macro economy, interest rates, oil prices, and Iraq mean that we're taking a more hold-fast/conservative approach to our portfolio," said Simon. The fund manager prefers single-B credits to double-Bs because the latter are more sensitive to interest rate moves. At the other end of the spectrum, Putnam is trimming exposure to triple-C credits to 11%, versus the Merrill Lynch European Currency High Yield Constrained Index weighting of 9.5%. The fund has a 66% weighting in single-B credits versus the benchmark's 39% weighting.
While analysis and issue selection for the portfolio is strictly bottom-up, on a sector basis the fund is overweight capital goods and basic materials (42% versus the index weighting of 29%) and underweight consumer cyclicals and staples (30% versus 36%). The top 10 issuers, comprising about 25% of the fund, include publishing company Seat Pagine Gialle, specialty chemicals company Nalco and containers company Crown Cork & Seal.
Putnam is continuing to see new interest from investors both in the U.K. and the Continent, despite the $2 billion outflow from U.S. high-yield funds in one week earlier this month. "The quality and breadth of new issuance is a key driver of the European market," said Simon. "Investors who weren't interested when four out of five new issues were coming from telecoms, media and technology companies are now keen to get involved." The European high-yield market, at one eighth the size of that in the U.S., is growing dramatically and Simon expects outstanding market size to increase from E120 billion today to E200 billion by the end of 2006. Some recent deals were priced too aggressively, he added, declining to specify any.