Aviva Investors’ high-yield bond manager Chris Higham believes investors have become too jittery about corporate bond risk, which he said had a lower-than-perceived default rate.
Mr Higham, who manages the £58.5m Aviva High Yield Bond fund, said that, amid concerns over government balance sheets, there was a tight spread in developed market corporate credit.
He added that corporate balance sheets remain the “bright spot” as he was still not seeing a pick up in capital expenditure or any “recklessness” in corporate behaviour.
“We are still seeing a lot of turnover and sufficient liquidity for attractive returns,” Mr Higham said, adding that there was a 5 per cent default rate priced in for a reality of approximately 2 per cent, which he said was “an awful lot of compensation for default”.
The manager argued that in some cases, corporate bonds offered a safer investment than their underlying sovereign nations, using the comparison of Spanish telecom company Telefónica and Spanish government bonds.
Mr Higham said: “If you perceive companies to be safer than [their] underlying sovereign, why should there be a credit spread?”
Another area the manager is interested in is corporate hybrid bonds, which he said were particularly appealing on a risk-return basis. He highlighted the recent issue by Dutch telecom firm KPN, which he said was “quite attractive with a significant rights issue of close to 7 per cent” – and was made more appealing through the backing of business magnate Carlos Slim, the world’s richest man until last month.
“The GKN yields are similar to its equity but with a lower level of risk. We see them as a continuing opportunity in the next few years,” Mr Higham added.
The manager saw less value in so-called CoCos – contingent convertible bonds – which he saw as having equity-type risk but without a comparable level of return.
