Old Mutual Asset Managers in London is looking to pump about £9 million into U.K. retail and consumer investment-grade corporate bonds in the coming weeks. It is anticipating price weakness brought on by leveraged buy-out and merger & acquisition speculation in those sectors. "We have been keeping some powder dry to take advantage of volatile situations quickly if they get overdone," said Stephen Snowden, corporate credit fund manager. He is responsible for the £290 million Old Mutual Corporate Bond Fund.
Snowden said some kind of headline risk is bound to emerge and present a buying opportunity. "Almost every day there's some news around one name or another," he said. Snowden added investors have been particularly concerned about private equity involvement in the U.K. retail and consumer sectors since Philip Green's bid for Marks & Spencer last spring. "I can't predict what the names will be or what the news will be, but we have the flexibility to take advantage of any mispricing in the market." Snowden plans to fund the move by reducing the fund's 7% position in cash and government bonds to less than 5%.
The fund manager has a favorable view on credit, with a 24% overweight in triple-B paper. "We like the extra carry on triple-Bs, which yield 135 basis points over gilts versus 35bps over for triple-As," noted Snowden. And he isn't concerned about an imminent deterioration in fundamentals.
The fund's objective is to outperform the Investment Management Association U.K. Corporate Bond Sector. Its assets are predominantly investment-grade but it can hold up to 20% in high-yield or non-rated bonds; currently that weighting is at 16%. The 5-10% in cash and govvies is not a reflection of a defensive attitude, stressed Snowden. "The negative carry associated with not holding corporates is not as punitive now given the spread tightening we've seen and we prefer having the facility to trade actively."