View the article online at http://citywire.co.uk/money/article/a607137
Bank bonds worth the risk, say Invesco’s Read and Causer
Bond fund managers Paul Read and Paul Causer remain focused on high yield and financials bonds, which they believe are more attractive than government and high-quality corporate debt.
A recent change, however, has seen Tate & Lyle (TATE.L) sold down after a strong run, while the fund's stake in outsourcer Capita (CPI.L) was increased on price weakness. The shares have since gained following a strong trading update.
Sticking with financials overweight
Causer and Read, who run the fixed income component of the fund, are focusing on the larger, northern European and American 'national champion' banks, investing in both subordinated and senior bank debt.
While a number of their rivals give the sector as wide berth as they can because of sovereign debt and regulatory worries, Read and Causer are happy to maintain their overweight in financials. They believe investors are being handsomely rewarded for the risks in the sector compared with the risk/reward ratio on many non-financial bonds.
'We think that the reform of bank capital structures which has taken place over the past three years and which is ongoing will result in better capitalised, more liquid, better funded and more conservative institutions. As debt holders, we welcome this and we think that there are generous yields available in the market, relative to the credit and subordination risks entailed and relative to non-financials.'
Sanguine about Spain
The pair are also sanguine about Spain's predicament, anticipating that its banks will receive the support they need.
'The second round of the LTRO in February saw large additional funding for banks, the EU rescue funds, the EFSF and the ESM, are being given increased flexibility to provide direct support to sovereign and corporate bond markets, Spanish banks are to be given further support and banks across Europe have continued to strengthen their balance sheets and increase their liquidity levels,' they said.
The duo are also buoyed by an aggregate yield of 10.4% on sterling Tier 1 subordinated bank debt.
'The sector continues to be supported by tenders from banks across Europe, including Spain and Italy, to buy back their own debts. We hold significant exposure in the fund to subordinated bank bonds as well as senior bank debt.'
Adding BA senior debt
At the end of June just over 20% of the fund was in BBB-rated bonds, and 31.3% was in BB debt. The pair have recently added a BB-rated senior unsecured bond in British Airways on a yield of 8.37%, as well as buying a subordinated BBB rated bond in insurer Direct Line yielding 9.25%.
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- Tate & Lyle PLC (TATE.L)
- Capita PLC (CPI.L)
- Lloyds Banking Group PLC (LLOY.L)
- Royal Bank of Scotland Group PLC (RBS.L)
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