Cazenove Fund Management is looking to continue building its positions in medium- and long-dated single-A and triple-B bonds in its £180 million U.K. corporate bond fund. The firm has been selling triple-A rated bonds and tier-one bank paper--for example Lloyds and Barclays--to fund the new purchases, says Michel Gonnard, London-based fund manager. The firm has also been trimming its telecom exposure, when volatility permits. It had mmo2 and various issues from British Telecommunications, and now it holds BT's 5.75% of '28, which it will exit once volatility abates somewhat. "Most of the work is to build positions in long-dated triple-B issues in the primary and secondary markets whenever we can find it," says Gonnard.
The brighter picture for the economy, corporate earnings and profits has prompted Cazenove to look further down the credit spectrum. "If you look at the spread between triple-B and gilts, you can pick up triple-B paper for about 250 basis points over gilts. Investors are more than compensated," says Gonnard. "Our philosophy is not to pick the winners, but not to pick the losers. We're happy to take the yield on these triple-B bonds with a little capital gains, and reduce default risk through diversification," he adds. The fund has gone from holding 70 issues to 85 over the last six months.
Recently, Cazenove added First Group, a transport company with bus and train franchises in the U.K. and U.S. It also purchased Hilton's debut sterling deal and Capital Shopping Center's first offering. "Effectively, they are solid credits with very steady and positive cash flows and low gearing," says Gonnard. The fund uses the Merrill Lynch non-gilt index as its benchmark.