Insight Investment in London is focusing its junk investments on single- and double-Bs with a view to including them in its mixed investment-grade and high-yield corporate bond portfolios. Craig Abouchar, senior high-yield fund manager, said Insight has about £250 million in high yield across a number of portfolios, the bulk of which is in the £3 billion Halifax Corporate Bond Fund.
Abouchar is taking a conservative approach based on the risk-return profile of the funds and the yield compression the high-yield market has seen between rating qualities. "Even though we're very focused on coupon flow in our funds, we're putting a lid on triple-Cs since we're no longer getting paid adequately for the additional risk," he observed.
While Insight's corporate bond funds can include up to 20% in high yield, the level of junk currently hovers around the 7% mark and is unlikely to increase in the near future. "This is a grim time to be adding to high-yield portfolios, given that you're forced to pay one to two basis points over the current offer if you want to buy anything in size," said Abouchar.
That said, the fund manager is intent on increasing diversification in the portfolio and aims to raise the number of names in the portfolio from 20 to about 30 or 35. He is moving away from high concentrations in any one name, observing, "there is very little difference between credit risks these days, and the return on one name is much like that on another."
The kinds of names that fit Insight's criteria include the B2-rated Debenhams 10.5s of '12, the B1-rated floating rate notes of Waste Recylcing offering 350 basis points over six month LIBOR, and the double-B plus rated Rank Hovis McDougal 8.8s of '17. "We'll tend to go for more seasoned names in the secondary market with a high coupon, even if they carry a higher dollar price, since the fund's performance is yield-driven," said Abouchar.
