Baring Asset Management is increasing its allocation to highly rated credits because riskier bonds aren't offering enough yield. "We became increasingly defensive toward the end of last year. The extra yield the market is now offering for lower-rated bonds is not enough to compensate for the risk in the asset class," says Ed Britton, senior credit fund manager for the U.K. fixed-income team. Baring's U.K. team looks after £2.4 billion in corporate and government bonds.
While Baring has greatly reduced its exposure to lower-rated names, it has been buying triple-A names such as the European Investment Bank and Kreditanstalt fur Wiederaufbau. Britton says he has buying paper in the 10-year area and is looking to increase his positions in EIB and KfW. He has also been buying senior bank debt.
Overall, Baring is reducing its corporate bond allocation and putting more into government bonds. One reason Britton is less positive on credit is that while last year saw companies de-leveraging and paying attention to bondholders, this year he expects companies to pay more attention to equity holders and use capital to generate profit instead of paying down debt. He also expects a new regulation that requires life insurance companies to hold more capital against riskier credits will prompt a sell off and push out spreads.
Britton has been focusing on medium-dated bonds in lieu of longer-dated ones, because the demand for duration has put more yield into the 10-year area of the yield curve. Specifically, Britton has been switching out of longer dated gilts into ones in the 10-year range.