Higher yielding sterling bonds in the UK make up less than 1% of the total sterling bond market, acc...
Higher yielding sterling bonds in the UK make up less than 1% of the total sterling bond market, according to Stephen Snowden, manager of the Aegon UK Extra Income fund.
He says the fact that there are only about 30 companies issuing high yield bonds makes it difficult to build a sustainable portfolio that does not invest in overseas or convertible paper, both of which he feels bring equity volatility into a fund.
Snowden adds that many funds claiming to be UK bond portfolios rely on overseas, even emerging market bonds.
Even so pension funds have been able to take advantage of the higher yield market, creating a surge in demand. The replacement of the minimum funding requirement will remove the necessity for them to hold a sizeable proportion of their assets in long-dated gilts, says Michael Deakin, chief investment officer at Clerical Medical Investment Management.
Deakin also points to FRS17 as another factor that will lead to more investment in bonds. 'The FRS 17 requirement to show the liabilities of pension fund schemes on the company balance sheet has discouraged investment in more volatile assets,' he says.
He notes, however, that a stronger economic outlook could result in a flow of funds to relatively cheap equities, but he argues that uncertainty should keep demand high for the time being.
He says: 'Until the economic outlook does become more stable, we anticipate some reluctance on the part of investors to leave the relative sanctuary of more secure asset classes.'
With the collapse of such notable companies as Enron and Marconi, David Fancourt, manager of the M&G High Yield Corporate Yield Bond fund, stresses the importance of doing homework before buying a company's debt.
He says it is sensible to avoid companies with low levels of assets because, if the worst does happen, there is not much that can go back to investors.
Snowden sees Credit Suisse as such a proposition, for example. He says the acquisition by the financial institution of the US broker DLJ and the large sums needed to support staff retention at the company have weakened it.
Fancourt says airlines such as Swiss Air and BA are ones to avoid and he sees the tech and telecoms sector and particularly fibre-optic companies as being risky.
He says: 'Telecoms companies have built big networks but these are very commoditised industries and no one is making any money.'
Both Snowden and Fancourt are cautious on NTL. Fancourt judges it to have far too much debt and Snowden also perceives it as being far too risky to be a sound investment.
Fancourt says Aventis has provided a much higher yield while being a BBB investment grade bond.
He adds: 'At one point, it yielded 17.5%. It has good assets and a wave of money has been going in while supply of higher yielding debt is limited.'
A higher yielding bond Snowden favours is Yell Finance, issued by Yellow Pages, the business sold last year by British Telecom. He says its 9.8% yield makes it look attractive as it has a solid and sustainable business behind it.
Non-investment grade bonds good in long term.
Increased demand for higher yielding debt.
High yields from some investment grade bonds.
Recent high-profile company collapses.
Limited investible universe in the UK.
Stronger climate may see shift to equities.