Legg Mason’s Edmonds: M&A to drive 8% return in high yield

High yield bonds will return 7%-8% in 2011, according to Ian Edmonds of Legg Mason, driven by a surge in M&A and falling default rates.

Edmonds, manager of the group’s £545m Global Multi Strategy Bond fund, said the asset class should repeat returns seen in the first six months of 2011 thanks to favourable conditions.

“We continue to think high yield will return 7%-8% for the year,” he said.

“It has probably been a bit front end loaded in that high yield is already up around 4% so far, and that is one of the reasons we have cut back slightly and put some protection in place.”

He has recently de-risked his portfolio and taken profits in high yield after returning 5.8% on the fund over one year against the Global Bond sector average of 4.7%, according to Morningstar data. He added the backdrop for high yield is supportive in the near to medium term.

“Supply has surged this year. In the US, it is running at an annualised basis of $365bn, far higher than the $262bn seen in 2010,” said Edmonds.

“The story is the same in Europe. Much of this issuance has been for refinancing, which is a positive for the market and allays fears about the rising number of maturities coming up in the high yield and loan markets in the coming years.”

Edmonds’ high yield weighting is focused on utilities and other defensive sectors. The manager has recently rotated out of investment grade bonds, where he sees a lack of value, and emerging markets, where the threat of increased volatility has led to a reduction in some of the fund’s dollar-denominated sovereign and corporate debt.

He has also increased his cash waiting and reduced his duration by half a year to four years.

“This has resulted in us building up some cash, although this is purely opportunistic, leaving us in a position to take advantage of any market volatility in the future,” he said.