Fidelity Investments in London is neutral the benchmark on credit ratings and duration and recently moved up the rating curve and down the maturity curve to achieve this position. Ian Spreadbury, senior portfolio manager in London responsible for the firm's E570 million in European high-yield investments, intends to maintain this position for the near term. "Our view is that credit quality is stable-to-improving over the next six months and that valuations are starting to look expensive," he said. As a result, the portfolio has a 14% weighting in triple-Cs, 55% in single-Bs, 23% in double-Bs, and an 8% weighting in triple-Bs and cash. It is benchmarked against the Merrill Lynch European high-yield capped index.
"The market is likely to trade sideways from here; we don't expect further tightening, which is why we lightened up on the triple-Cs," he added. Spreadbury does not want to be long or short duration at the moment due to the relatively high correlation between high-yield and government bonds, which rises as spreads tighten.
On a sector basis, the portfolio is neutral and he wants to keep it that way. He is, however, positive on European industrials, auto suppliers, aerospace, construction and telecom equipment names. "While the European industrials and auto suppliers have been quite disappointing, we are seeing signs of a pick up in top-line growth and see opportunities in these sectors--in names like ABB and Invensys in industrials, and Schefenacker and Teksid in autos." The fund manger is constructive on aerospace names in Europe like Fiat Avio and MTU on the back of orders from Boeing and Airbus, and Heidelberg Cement in the construction sector, which he expects will benefit from a pricing pickup in Germany. Telecom equipment manufacturers like Alcatel and Ericsson are high on his list, mostly because he expects buy-backs in the sector, although he also has confidence in the companies' credit profiles.
Spreadbury's biggest negative bet is a 3% underweight in chemicals, which he said are under pressure on the cost side due to the high price of oil.