Rathbones' Jones: great rotation is not on the cards just yet

The gilt market may be due a sell-off but a great rotation out of credit is not imminent, according to Rathbone Strategic Bond manager Bryn Jones.

Citywire A-rated Jones (pictured) doesn’t view a ‘great rotation’ out of bonds into equities as a risk just yet, noting that underlying growth rates do not support the trend – so if growth collapses, a shift back into bonds may not be out of the question.

‘I don’t see the great rotation as a massive issue. The gilt market will sell off, but I don’t see a rotation out of credit yet,’ he said.

Jones and David Coombs, co-manager on the Strategic Bond fund, have moved to take a more defensive stance in recent months and are currently seeking out bonds and funds offering attractive yields with low duration. The managers have also benefited from a recovery in the European sovereign debt market, but have played the theme through corporates rather than sovereigns.

‘I am playing the poster boys of Europe. In Spain and Italy, I have not touched the sovereign debt as there is good money to be made, but also lost, as the volatility is too high,’ he explained.

Positions have included a Santander lower tier two floating rate note, yielding more than 6%, Bank of Ireland debt due to mature in 2013 offering an attractive yield, and Unicredito.

Commenting on the Unicredito exposure, he said: ‘If this bond gets called it will be a champagne moment. If not, you are still getting paid a reasonable yield.’

Jones has also sought to back undervalued debt issued by companies that are deleveraging – with banks featuring heavily in the Ethical Bond fund he runs, and an overweight in subordinated financials, insurers and banks. Holdings include French insurer CNP, Nationwide, Coventry Building Society and what he describes as ‘special situations’ at Crédit Agricole and Société Générale, where he bought into lower tier two floating rate notes on double digit yields. These have now narrowed to 4%-5% and have the advantage of having low interest rate sensitivity, he added.

The manager also has exposure to European telecoms, another sector that is deleveraging and deemed a value trap by some equity managers, with a holding in debt issued by Telecom Italia.

Other themes in the Ethical Bond fund include housing associations – such as Saxon Weald and Quadrant, which Jones notes carry a better spread than supranationals. ‘They often have a good cashflow and are high quality businesses,’ he added.