LUXEMBOURG Corporate credit is the most promising investment within fixed-income in the next year or two, with attractive issues likely from the retail, metals and mining and auto sectors, said a Janus portfolio manager.
Corporates offered clearly higher spreads than agencies or mortgages given the U.S. government control of mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N, said Gibson Smith, co-Chief Investment Officer of Janus.
The debt-reduction drive among many corporations should support the market for their credit, he said as part of the Reuters European Funds Summit.
"We are seeing tremendous demand for credit-oriented investing right now," he said. "Corporate credit offers a much better competitive advantage ... We are very concerned about the downside associated with the mortgage market today."
"What we have seen over the last 18 months and we think this will be the case for the next 18-24 months is significant deleveraging ... These actions are very good for the bond holders of the companies that are reducing debt."
Janus had become extremely positive over the past six to 12 months to retailers, given large cash balances versus debt, metals and miners, given metal price rises and many companies' focus on deleveraging, and the automotive sector.
"As the healing process continues in 2009 we believe these sectors will benefit," Smith said in a telephone interview last week.
However, he warned that picking the right security was the key to success today after 2009's very broad recovery.
"We believe there are truly some winners and truly some losers," said of automotive issuers.
Janus's U.S. Short-Term Bond A and U.S. Flexible Income A funds have clearly outperformed Barclays Capital benchmarks over the past three years and won a series of Lipper awards in 2010, including in Austria, France, Germany, Hong Kong, Italy, the Netherlands, Spain and Switzerland.
The group's funds benefit from their move from corporate credit into U.S. treasuries and agency mortgages during the height of the 2007-2008 crisis.
Janus, with $159.7 billion in assets under management at the end of 2009, says it takes a bottom-up approach to fixed income investing, analyzing individual companies, while it says most fund managers had a top-down system looking first at the economy.
Smith said it would take an "extended period" to recover from the crisis that followed 20 years of excess.
"Our net view on the economy is one of moderate growth with continued restructuring and imbalances that need to correct over time," he said, adding he believed the risks of a double-dip or of rising inflation sparked by accelerating growth were low for the next 12 to 24 months.
One Janus investment that underperformed the Barclays Capital benchmark was the Janus U.S. High Yield Fund, the gap most pronounced in 2009.
Smith said that only about 4 percent of managers beat the Barclays Capital High Yield Bond Index's 58 percent rise in 2009 and argued that Janus's aversion to the highest risk issues meant it would underperform such a large rally.
"Many of the top performing issuers in 2009 were the companies that were on the cusp of going into the bankruptcy courts.... Some of their bonds were up three, four, five hundred percent in 2009," he said.
"I'm very concerned that some of the bonds that performed the best in 2009 are some of the most vulnerable in 2010 as the risk of bankruptcy will re-emerge over the next 24 months for many of these companies."
(Reporting by Philip Blenkinsop)