Putnam Investments continues to maintain a down-in-quality bias for its high-yield funds. Stephen Peacher, cio in Boston, says Putnam plans to keep an overweight allocation to triple-C bonds on the view that they will outperform higher-quality investments this year. At the same time, he doesn't expect high-beta assets to generate the returns of last year. He declined to name specific credits, but says he expects spreads will tighten further as the high-yield market continues to attract money, pointing to oversubscribed new deals as evidence of demand. He cites a stronger economy and equity market as other reasons for an expected tightening in high-yield bonds.
Peacher says despite this strong backdrop, he sees more risk in the utility and chemical sectors, as well as in autos and airlines, although he doesn't see any dramatic declines coming. He highlights media, wireless, forest products, gaming and energy as solid sectors. The high-yield funds primarily use the J.P. Morgan High-Yield Index as their benchmark. Elsewhere, Putnam's funds are generally underweight double-B assets and have a neutral-to-overweight weighting to single-B bonds.
Overall, Peacher says 2004 should be a healthy year in the high-yield cycle, coming off a compressed negative period up to 2002 and a recovery last year. "We've been surprised at how much spreads have tightened over the last month and a half already," he says, noting the Merrill Lynch High Yield Master Index gained 2.2% through the middle of January.