Major shifts in the bond markets have prompted fixed income manager Azhar Hussain to seek perceived safety in lower-rated debt and US issuances.
The £249m Royal London Global High Yield Bond fund manager said he had been focusing on investing in single B-rated debt, which made up just less than half of his portfolio at 48.2 per cent.
Mr Hussain said such debt was “the place to be”, given the higher yields provided protection from potential rises in interest rates.
The market expects the US Federal Reserve to increase its interest rate later this year or early in 2016.
Uncertainty about this move, coupled with the unsettled situation of Greece on the brink of a default and possible exit from the eurozone bloc, has pushed up yields across much of the fixed income market.
As yields move inversely to prices, this means bond investors have been negatively hit.
Data from FE Analytics shows indices tracking US and European government bonds have both lost money in the past three months, while indices tracking high yield have produced positive returns in the same period.
Mr Hussain said seeking out lower-rated, single B debt was a sensible strategy as there was less movement in yields compared with more highly rated bonds at present.
“You’re not going to get the interest rate volatility and you are getting paid for the risk, while in BB you are not,” he explained.
“BB is continually underperforming as it is far more sensitive to interest rate changes.”
While bonds rated BB make up 39 per cent of Mr Hussain’s portfolio, this represents a 15 per cent underweight compared with his benchmark Bank of America Merrill Lynch BB-B Global Non-Financial High Yield Constrained index.
The manager has also been eyeing debt issued by US-based companies and has added 19 percentage points to his portfolio in the past 18 months, taking it to 49 per cent.
He said these moves would help his portfolio ride the increased levels of volatility he expected in the bond markets.
Officials from both the Federal Reserve and the European Central Bank have recently discussed the issue of wild bond market movements.
The head of the UK’s Debt Management Office also raised concerns that the swings could cause investors to steer clear of buying its bonds at auction.
Since the launch of the fund’s retail share class in April 2013, the vehicle has delivered 10.3 per cent in the second-quartile compared with the average 8.8 per cent return by peers in the IA Sterling High Yield sector, data from FE Analytics shows.
Elsewhere, while Mr Hussain said he had reduced exposure to emerging markets and the UK by 5 per cent and Europe by 11 per cent in the past year, he had recently started to revisit some of these regions.
Recent purchases include Russian telecommunications company VimpelCom, which he said had most of its assets in Italy and so was not a strict Russian play.