Lombard Odier Darier Hentsch, a Swiss asset manager with roughly E4.12 billion in euro- and sterling-denominated corporate bonds, favors high-beta names as valuations in both the sterling and euro markets remain expensive. London-based Christine Farquhar, head of fixed income, says while she believes fundamentals for credit are still improving, there will be limited opportunities for spread compression as U.K. investors hunt for yield.
Single-A and triple-B names offer value but the firm plans to remain cautious in its selection process. "We have a very structured fundamental analysis to our credit universe, and are very particular about where we are getting yield. We avoid anything that may go below investment grade in the next 12 months," says Farquhar.
Recently, Ford Motor Co. was on the manager's list of companies to avoid but the automaker has since been reinstated. Bombardier Inc., however, remains on the avoid list. Farquhar says the list is relatively short because she and her team believe the outlook for credit is fundamentally sound.
Farquhar says value is hard to find in industrial names and subordinate financial paper that can offer a yield pick up of between 100 and 150 basis points over government bonds. She says the money manager is less enthusiastic about high grade swap-related credits such as Kreditanstalt fur Wiederaufbau and the European Investment Bank, which are less likely to outperform in a rising interest rate environment.
Lombard Odier uses the Merrill Lynch sterling and euro corporate bond indices as its primary benchmarks.