Standard Life Investments has been adding high-yield names to its E16 billion corporate bond portfolio. Andrew Sutherland, investment director for credit at the Edinburgh-based manager, says he favors high yield, because rising U.K. interest rates and U.S. government bond yields could lead to volatility in the bond markets. However, Sutherland considers high-yield names to be protected from that volatility.
In addition, the ratio of downgrades to upgrades has narrowed this year almost to par, which in Sutherland's opinion suggests the best performance of investment-grade corporate bonds is over. And, with the economic environment more sanguine and causing fewer downgrades, increased corporate borrowing could soften existing spreads and increased merger and acquisition activity could prompt volatility.
Sutherland is positive on lower-rated credits, as triple-Bs have performed well and high yield still looks attractive. He has been adding new issues from Flender, a wind turbine machinery maker, Avio, an Italian aviation parts manufacturer, and Ardagh, an Irish glassmaker. All these companies recently had debut transactions.
Standard Life has been adding euro-denominated high yield, because many of the issuers in the sterling market, such as Chelsea Village, Castle Transmission and Yell, have being buying back debt recently.
Aside from high yield, Sutherland has been buying more structured bonds. Most recently, he has bought new issues from Punch Taverns and Mitchells & Butlers, both pub securitizations. Sutherland says he likes structured bonds because they offer better spreads for an equivalent rating. He also bought Sallie Mae's euro-denominated paper in September, and is considering buying into the issuer's upcoming deal. Standard Life uses a variety of benchmark indices.
