M&G Investment Management is selectively adding to double-B bonds with a focus on rising stars, according to David Fancourt, fund manager in London of M&G's £1.1 billion high-yield corporate bond fund. He declined to say how much will be added to such names, emphasizing that overall he is cautious on high yield since he expects a wave of leveraged-buy-out-related issuance in the coming months which will drive spreads wider.
The fund includes both investment-grade and high-yield bonds, mostly triple-B to single-B rated, and is benchmarked against a two-thirds/one-third composite of the Merrill Lynch European Constrained High-Yield and ML Sterling Investment-Grade indices.
"We don't expect the huge capital gains we've had in the last couple of years but there are still stock-picking opportunities where companies are going from high yield to investment grade," noted Fancourt. He highlighted Dutch supermarket operator Ahold and Swiss-Swedish engineering group ABB as likely rising stars over the next 12 months. In addition, M&G has recently bought bonds of double-B rated British Energy and EMI. Fancourt noted that liquidity in these names has been quite thin of late: "Even during the sell-off when we thought it was a good time to buy, there wasn't much for sale."
It is still too early to jump back into the market, despite the spread widening, said Fancourt. "Yes, credit fundamentals are relatively benign, and valuations have improved-- but I can't get overly bullish," he observed. "The problem is that if we get beyond this hedge fund-related disruption and bonds strengthen again, we risk getting a wave of new issues that will weigh on the market." Fancourt pointed to a handful of large LBOs in the wings which are likely to include high-yield bond offerings, including Spanish travel booking firm Amadeus; Greek, Italian and Spanish telecommunications companies TIM Hellas Communications, Wind and Auna; and U.K. currency exchange company Travelex.
