Threadneedle stays defensive in high yield bonds

By Claire Milhench

LONDON (Reuters) - Threadneedle is staying defensive in its high yield bond fund, despite the spring rally in the sector, betting that weak growth will hinder over-leveraged companies over the next few years, impacting the default rate.

"The focus should be on company fundamentals now," said Barrie Whitman, head of high yield at Threadneedle. "We think growth will be anaemic for the foreseeable future, which does a lot of damage to over-leveraged companies."

Among his top 10 holdings are defensive names like Unitymedia , a German cable company which has been deleveraging, and Crown European, a metal can packager which was recently upgraded to investment grade. "We have added quite a lot to that and have done very nicely on it," Whitman said.

Virgin Media, also in the top 10, has been addressing its refinancing risk and has been a good performer, he said.

According to Lipper data, the fund, which has some 435 million pounds under management, was down 3.09 percent in the 12 months to end-June, but up 1.98 percent against peers in the Lipper Global GBP high yield bond sector.

The fund is underweight consumer cyclicals, basic materials and the lower quality Triple C-rated credits. In the last quarter of 2008 and the first quarter of 2009, Whitman said he added cyclicality but this has since been trimmed.

"We bought good quality cyclicals and investment grade credits where there are high yield type spreads, such as Xstrata (XTA.L)," he said. He also bought risky but cheap cyclicals such as British chemicals company Ineos and workforce management company Kronos.

"We didn't want to pay lots of money for cyclical companies which were also leveraged because you have to get your timing right in terms of the recovery, so the only thing we were buying there were things we thought the market had overdone," he said.

At the margin, Whitman has taken profits by trimming more distressed credits as they doubled or tripled in price but he has retained some exposure.

Given the expected increase in defaults, he said he would only take more financial risk as long as he is not taking more cyclical risk, or more cyclical risk as long as he is not taking too much financial risk. He cited ITV (ITV.L) as an example of the latter, which he has added to recently.

However, he is not inclined to materially increase cyclical exposure at this stage as he believes a period of consolidation is possible after the rally in the sector.

(Editing by Dan Lalor)