Easing default risks are behind Reed’s focus on lower-rate bonds

Top-performing fixed interest manager Paul Reed is maintaining his focus on lower-rated bonds in 2010 after noting an easing of default risks.

Aberdeen’s Reed, who runs the £36m Marlborough High Yield Fixed Interest fund, has a strong bias towards lower-rated securities – with nearly 50% of its holdings in B-rated credits and almost 20% rated CCC or below.

“There are rewards to be had when you identify value among lower-rated credits and we use a bottom-up approach to find companies with robust management and  the ability to control risk,”
he says.

“The picture emerging for 2010 is one where the results coming in from companies are often beating expectations and the default rate is looking likely to end up a lot lower than the long-term average.

“In that context, if you are looking for income, then high yield is looking very attractive in comparison with gilts and investment grade corporate bonds.”

Although Reed admits investment grade corporate bonds offer a good premium over government debt, he believes they are exposed to the risks of the gilt market.

“Investment grade corporate bonds have made a good recovery and although spreads still have scope to narrow further against government bonds they are now likely to share in the overall direction of the government market to a much greater extent,” he says.

“While the high-yield market is a short-dated one, investment grade bonds tend to be longer dated and so carry a similar duration risk from inflation as gilts – you just get paid a little bit more for your credit risk  worry.”

One of the fund’s top 10 holdings is Spanish company Cirsa, a slot machine manufacturer which also operates arcades, casinos and bingo halls.

“We like this company because of proven management ability to maintain robust results in a difficult economic climate and it has Latin American interests which provide growth opportunities outside the home market.”