Edinburgh-based Baillie Gifford is looking to reduce risk across its portfolios by shifting funds out of lower-rated bonds and into higher-rated assets within high-yield and investment-grade. It also plans to move some money from high-yield into asset-backed bonds. "Investors are no longer getting paid to take on additional risk," said Stephen Rodger, fund manager responsible for the firm's roughly £500 million in investment-grade debt and £70 million in high-yield bonds. He declined to quantify any of the shifts being planned.
Chasing higher-yielding bonds is the worst thing to be doing in this tight spread environment, said Rodger, who prefers to go for something yielding a little less but making up for it in liquidity. "We don't want to get caught in the riskiest and most illiquid high-yield bonds when we may be at or close to the top of the market," said Rodger, explaining why he is moving out of triple-Cs into double- and single-Bs in the high-yield space. Rodger participated in the E150 million deal from single-B rated Editis recently, a French publishing company with a leading market share in what he called a defensive business.
Rodger sees good investment opportunities in asset- and mortgage-backed securities, in particular whole business securitizations such as U.K. pub deals. These can offer up to 10 basis points more than a similarly rated investment-grade corporate. He noted the firm is limited as to how much it can shift into asset- and mortgage-backeds by restrictions on tracking error.
In investment-grade corporates, where Baillie Gifford plans to reduce its exposure to triple-Bs and increase its holdings in single- and double-As, Rodger favors telecommunications firms and banks. "France Telecom and Deutsche Telekom are attractive investments since both companies have taken appropriate steps to reduce their debt burden," he said, noting DT has been upgraded to single-A by Fitch Ratings and could move up another couple of notches in price if Standard & Poor's and/or Moody's Investors Service follows Fitch's lead.
