Schroders in big move to emerging debt
LONDON (Reuters) - Schroders has hiked exposure to emerging market and high-yield debt in its Strategic Bond Fund, fearing higher inflation and interest rates will put particular pressure on mainstream western debt.
Nick Gartside, head of global fixed income at the fund firm, said allocation to the sectors is now at more than 45 percent from a low of just 3.5 percent in February.
Gartside said the boost has come as he anticipates two "bolts of lightning" on the horizon for bond investors -- higher inflation and higher interest rates.
"Inflation will surprise on the upside very quickly, particularly in the UK and U.S. In this environment, emerging market debt, inflation-linked bonds and high yield should make money," he said.
"I wouldn't touch (western) government bonds with a bargepole," he said.
Emerging market debt offers better value than high yield at the moment, he added. The switch has come at the expense of U.S. agency mortgage-backed securities, where allocation has been cut to about 20 percent at end-October from 75 percent in February.
The fund, which has some $900 million in assets, is invested in sovereigns like Indonesian and Egyptian local currency bonds, but has also been adding corporates.
Gartside said that as emerging markets are industrialising at a rapid rate, strategic infrastructure assets are often implicitly or explicitly government guaranteed, but will offer a yield as much as 2 percent higher than the sovereign bond.
Recent additions include Indonesia's second largest coal company PT Adaro (ADRO.JK), a BB credit expected to benefit from its proximity to India and China as their demand for coal rises. Another recent addition is Brazilian oil producer Petrobras (PETR4.SA), a BBB- credit yielding 7.8 percent.
HIGH-YIELD ADDITIONS
In high yield Gartside expects average spreads on U.S. high yield assets to tighten by another 200 basis points from about 750. Schroders' aim is to double its broader high yield allocation from about 15 percent over the next three months.
In this segment he has very recently added Virgin Media, Irish manufacturer Ardagh Glass and two Fiat (FIA.MI) bonds.
Allocations to U.S. inflation-linked bonds have remained at 10 percent, as Gartside expects a huge supply shortage.
He said there is a deliberate policy by Western governments to inflate their way out of the debt crisis -- indicated by the fact that the proportion of inflation-linked debt being issued has fallen dramatically in the UK, U.S. and Europe.
The fund is up almost 12 percent in the 12 months to end-October according to Lipper data, but down almost 13 percent against its peers in the Lipper Global Bond sector. Gartside said his total avoidance of financial debt had hurt the fund as Tier 1 debt has rallied since March. Continued...
