Royal London Asset Management’s Paola Binns has been seeking bargains in “safer” forms of corporate debt that have been hit by the indiscriminate sell-off of risk assets at the start of 2016.
The manager of the Royal London Sterling Credit fund said that while the “crux” of her portfolio had not changed, she had been looking for opportunities in favoured parts of the market as equity fears pushed down certain bond valuations.
Recent weeks have witnessed jitters over global growth and the impact of falling energy prices spilling over into new areas such as financials, with stockmarket declines attracting most of the headlines.
The S&P 500 and FTSE 100 indices have shed 7 and 8.4 per cent respectively year to date as at February 15, and Ms Binns noted that investors’ concerns had also created opportunities in the credit space.
She said: “We see a bit of volatility in the credit markets on the back of what’s happening in equities, and the negative stories on China and a possible slowdown in US growth. It has meant that some of the valuations in credit are looking quite interesting.”
As a result the manager has added to “safer” areas such as utilities, where she was able to “pick up on historically wide spreads”.
“We went for utilities, which are 100 per cent regulated and where cashflows are more secure.”
Ms Binns has also added to insurance names such as Prudential (pictured), which she viewed as attractive. “In a year where credit underperformed gilts, the returns were okay in the insurance sector. They are at attractive yields,” she said
As of the end of 2015, utilities made up 11.9 per cent of the fund, while insurance represented 9.3 per cent.
Ms Binns has also been favouring asset-backed securities (ABS) and infrastructure holdings, because she believes these are “not so sensitive to economic downturn”.
She said: “We have seen some cash inflows and I have been using them for ABS. In a small way we also added to hybrids and corporates that we have, because the pricing has changed so dramatically.
“We are more protected in a hybrid than in a tier 1 bank. We had yields of 9.5 per cent, which we felt were quite compelling.”
However, the manager, whose fund seeks to maximise its level of income over a period of around seven years, is unconvinced about some areas where she believes a liquidity premium is being charged.
“The markets are less liquid; there are periods where [liquidity] can disappear, even when markets are strong,” she said.
“We don’t believe in paying up for what are perceived to be liquid bonds, like supermarkets. We don’t believe they are good long-term value.”
In the past three years the fund has delivered 16.1 per cent, compared with the average return of 10.8 per cent by its Investment Association Sterling Corporate Bond peer group, data from FE Analytics shows.