January 15, 2012 3:51 am

Company bonds deliver in 2011

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Last year was an exciting one for bond fund managers, according to Stephen Rodger, manager of the £247m ($378m) Baillie Gifford Investment Grade Bond fund. Spreads widened over the course of the year, and opportunities arose to take advantage of highly attractive yields.

“There are a lot of disparately priced bonds in the market at the minute, so if you’re a stockpicker that’s great news,” says Mr Rodger.

He highlights holdings such as Crédit Logement, a French mortgage guarantee institution owned by French banks, which at December 12 offered a redemption yield of 11 per cent.

“We think that institution is well capitalised with a lot of money effectively sitting on deposit with the banks, which we think in time will be used to tender for the bonds,” Mr Rodger says.

Other opportunities include Lloyds of London, which the fund has owned for some time and offered a redemption yield of just below 13 per cent in December.

“There are a number of highly rated bonds that give you quite high yields,” says Mr Rodger.

“Both of these are single-A rated, and that is the average credit rating of the market. Of course they yield quite a lot, whereas the market itself will yield you currently about 5 per cent.”

The fund holds 60-80 bonds and has a relatively low turnover. Mr Rodger says he does not try to boost returns by taking interest rate positions or currency positions.

Meanwhile, although the manager adopts a bottom-up approach he acknowledges the need to keep an eye on the wider picture.

In July he started reducing some positions in relation to concerns about the state of the world, particularly Europe.

“We still liked the stock stories, but we started to take some of the risk off, because we could see those stories would probably be swamped if sentiment was to change. So we were in quite a fortunate position, in that when [volatility in] July, August, September, and indeed November and increasingly December, took place, we’ve been able to continue to outperform.”

Another holding that he highlights as having had an interesting year is the European Investment Bank (EIB).

“It is still triple A rated by S&P, Fitch and Moody’s. But we took a much closer look seven or eight months ago, and we were increasingly concerned that its major funders are the UK and Germany, which is kind of fine, but then after that you get into France, Italy and Spain. So that’s obviously not quite so good.”

He says EIB has always been seen as one of the most liquid and unambiguous triple A bonds within the market, as the institution has tried to build a quasi-gilt curve by matching the maturity and coupons of gilts. But he argues its outlook is worse than it might appear.

“It has vastly underperformed other triple As this year, and given the market’s average credit rating is A and this is triple A, it’s actually a triple A bond that has behaved as an A rated bond.”

The fund returned 6.24 per cent in 2011 (to December 12), while its benchmark (the Bank of America Merrill Lynch Non-Gilts index) was up 6.04 per cent.

With current market volatility and uncertainty expected to continue into 2012, Mr Rodger says focusing on companies and their operating environment should continue to deliver returns.

Nyree Stewart is deputy features editor on Investment Adviser, a Financial Times publication

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