Baillie Gifford, an Edinburgh-based fund manager with £600 million in corporate credit under management, has gone overweight telecoms and insurance companies on the strength of their balance sheet repair stories. Stephen Rodger, fund manager, says the firm has bought France Telecom, Deutsche Telekom, MunichRe, Prudential and Legal & General, all of which have been tightening now that it is apparent their risk profiles have been reduced.
"Telcos are a strong story, having reduced debt, de-leveraged and done rights issues. It's very clear that within telcos risk has been reduced and the bonds have been re-priced," says Rodger. Munich Re has also been a winner for Baillie Gifford. The German insurer issued bonds earlier this year at 99.5. They were at 114 last Monday with a 7.6% coupon.
U.K. and European corporate bonds have rallied considerably, and although he would like to sell some of the better-performing names in the portfolio, Rodger notes that it is difficult to find good values in the market. Therefore, he is looking for opportunistic trades where there are inefficiencies in the market. For example, he bought General Electric, a triple-A rated name, at 90 over gilts after it had widened out on negative sentiments. Rodger recently sold GE at 45 over.
"It's fair to say the market is quite inefficient. We still have double-A bonds trading as though they are triple-Bs. If you are prepared to take a contrarian view there is money to be made as those anomalies correct," says Rodger.
Ballie Gifford uses a combination of benchmarks: the Merrill Lynch all non-gilt investment-grade index, the Merrill sterling high-yield index and the Merrill euro high-yield constrained index hedged back into sterling.
