Newton Investment Management in London is scaling back its positions in high yield to 30 names from 45 and is taking money off the table. "The idea is to have about 20% of the portfolio in cash and to concentrate the remainder in names we know well with positive event risk," said Paul Brain, director in fixed income. Newton manages £3.3 billion in fixed income, of which about £200 million is in high yield. Brain did not say how much he would be selling in the coming months, saying only the strategy has been in place since early this year and still has "a little way to go."
While reducing investments in high-yield bonds overall, Brain is looking to concentrate his remaining holdings and could even increase allocations to names he likes from 3% to 5% of the portfolio if prices fall. Examples include Czech mobile operator Oskar Mobile's 7 1/2% bonds of 2011, which are trading at 115 1/2; German aerospace company MTU's 8 1/4% bonds of 2014, currently at 114 1/2; and entertainment company Warner Music's 8 1/8% bonds of 2014, which trade around 105 1/2. The market is speculating the first could be taken out by Vodafone, while the latter two are considering initial public offerings. "Between now and the take-out or IPO we get a nice coupon and afterwards there's less risk of default given the companies are less levered," said Brain.
On the flip side, Brain would rather hold cash than names like medical supplier Fresenius. Fresenius' bonds of 2011, with a coupon of 7 3/8%, yield just 4.52%, well below the 4.75% yield on sterling cash.
