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View the article online at http://citywire.co.uk/wealth-manager/article/a729649

Why Henderson's Pattullo & Barnard won't buy gilts (yet)

by Danielle Levy on Jan 23, 2014 at 10:05

The managers are positive on financials, with a 27% exposure to subordinated financial debt, particularly the old bank ‘step’ tier one capital bonds, which are set to be phased out by 2021. Barnard said the fund had reaped the benefits from its holdings in this area, as a number of banks have been buying back some of these bonds at a premium.

While new contingent capital (‘coco’) bonds provide a cushion between the old ‘step’ tier one bonds, Barnard and Pattullo say fixed income investors must be careful with tier one cocos as coupons can be turned off earlier than expected. As a result, their preference is for tier two cocos.

Rare chances

The duo also took the opportunity to buy into Nationwide’s £550 million core capital deferred share (CCDS) issue last year, a rare type of issuance on account of Nationwide’s mutual structure. The preference shares paid out a 10.25% coupon and have since rallied some 18% in capital terms.

Debt issued by Arquiva, the privately owned mobile phone company, and the AA are also recent additions to the portfolio.

The Henderson Strategic Bond fund has a distribution yield of 6% and posted a 22.1% rise over the three years to the end of December versus an 18% rise by the IMA Strategic Bond fund sector, according to Lipper.

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