"If you don't have to invest in high yield at the moment, it doesn't make sense to," said Barker, who manages money for institutions where high yield is generally an out-of-benchmark bet. Names the manager has held in size but is no longer keen on include French electronics company Legrand and U.K. insurer Royal & Sun Alliance. "Both of these companies are fine operationally, but they are rather expensive," he said.
Baillie Gifford plans to focus on 30 to 40 names, concentrating positions in companies the manager knows well, such as ones which have a track record in tough markets and where the rating agencies are overly bearish. Barker said he would even add to select names if the index were to widen out to 350 basis points over government bonds from 280 over currently.
One favorite is European food equipment manufacturer Enodis; another is U.K. food supplier Brake Brothers. "Both companies managed to get deals done in extremely difficult markets in the aftermath of 9/11, and have since been using earnings to pay down debt and reduce leverage," observed Barker. Furthermore, the manager feels the ratings on Enodis' 10 3/8%s of 2012 and Brake Brothers' 12%s of 2011 are too low. "Rating agencies can be very sticky when it comes to upgrades; if Enodis priced today it would likely be double-B if not investment grade; instead it still has a single-B rating from Moody's Investors Service and Standard and Poor's."