Invest in the Middle of the Credit Curve

VIDEO: Investing in BBB, BB and some B-rated bonds is a great way to secure reliable income, says fixed income expert at Henderson Global Investors

Alanna Petroff 23 May, 2012 | 10:07AM
Facebook Twitter LinkedIn


Related Articles
- Finding Bonds Yielding Between 4% to 9%
- Growth in the High-Yield Bond Market in Europe

More from the Morningstar Investment Conference
- Investment Ideas 2012

Video Transcript
Alanna Petroff: We just wrapped up our annual Morningstar Investment Conference, where we had a number of speakers take the stage. John Pattullo was one of those speakers. He is head of fixed income at Henderson Global Investors. He spoke in particular about the global economy and what that means for bonds and high-yields bonds. So when I did get to sit down with him one-on-one, here is what he had to say.

Petroff: What do you think about the current economic situation right now?

John Pattullo: Well, it's mixed and it's mixed between the States and Europe, and it's mixed within Europe. So the core of Europe, Germany is actually growing pretty well. The periphery is shrinking pretty fast. So you can't look at the aggregate economic European number, because it's meaningless.

The States is growing probably about 2% a year, which is subpar, but it's better than where it was. There are signs of pickup in the demand for credit in America, so they supply credit into the markets, into the banks. There is now evidence of some pickup for corporations wanting to borrow money and individuals being more relaxed about borrowing money as well.

Petroff: Do you think that we'll see that in Europe anytime soon?

Pattullo: No, and I think this is the biggest problem for [the ECB] president Draghi. So, he supplied lots of money with LTRO into the European banks. The money is there, but so far there isn't much evidence that individuals or corporations want to borrow the money irrespective of the price of money otherwise known as interest rates. And I think that's the biggest difference between America and Europe. As you know, there's different economic policies being applied to America and Europe and that's kind of where we are.

Petroff: So, with this in mind, where are you putting your money right now? How does that impact your investment strategy?

Pattullo: Yeah. We are very much focused on the middle of the credit curve, so very much in BBB to bottom end of investment grade and top end of high yield, which is BB. And we have got some single B noncyclical, high yield names as well. We don't like cyclicals. We don't like CCC which are highly leveraged businesses. All those assets are really in the core of Europe, so the centre of Europe, really Germany and Netherlands and so on.

In addition, we hold some American bonds and a lot of British bonds as well. We haven't really got hardly any exposure at all really to the periphery and the periphery is growing obviously being Portugal, Ireland, Italy and Spain. And so we just don't think we need to go there to chase yield. There's plenty of yield we can have in businesses like Kabel Deutschland which is like the Virgin Media equivalent in Germany. Cable TV business, great business, highly cash generative. Well, why don't we just buy that and knock out 5%, 6% yield? It just seems much more sensible, and that's why we call it sensible carry for the economic outlook.

Petroff: For a full write-up about his ideas on fixed income and high-yield bonds, see the link below this video.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures