Each week, a professional investor tells MoneyWeek where he'd put his money now. This week:Nicola Marinelli, manager of the MFM Glendevon King Global Bond Fund.
Bond investors are a cautious bunch, preferring to sit quietly at the top of the capital tree observing the equity scrummage below. Never more so than now. We are seeing a slow economic recovery and plenty of gloomy economic data. The bad news has been compounded by sovereign risk concerns, even for the UK. Any downgrade of Britain's AAA-rating will cause a rout. So, we prefer bonds from strong, defensive companies that can weather the current storm.
Despite recent price falls, yields are still very low on government bonds. We are focusing on the front end of cash credit to get a reasonable return with defensive features. The euro yield curve is very steep. The sterling yield curve is even steeper. This steepness encourages us to invest in slightly longer maturities offering higher yields without overly increasing risk.
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We also like shorter maturity bonds that offer protection from the potential downsides and uncertainty that comes with being redeemed many years hence. Equally, our selection is highly-rated A or higher by the leading credit-ratings agencies.
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Our first pick is a sterling denominated bond issued by EDF (EDF 8.75% 30 March 2012 XS0075123413), the leading French utility company. EDF is an attractive defensive play with a suitably broad business mix. Its balance sheet is robust and it has no major bonds maturing until 2013. So it should be able to manage repayments with relative ease.
Similarly, a sterling-denominated bond issued by RWE (RWE 6.375% 03 June 2013 XS0147048259), a German utility, features in our defensive core portfolio. RWE has strong financial metrics for example, it boasts annual sales growth of 3.5% and a debt/Ebitda (earnings before interest, tax, depreciation and amortisation) ratio of 2.55 times.
We have also selected two non-sterling bonds, as a counterbalance to ongoing concerns for the UK's currency. The first is a euro denominated bond issued by Telstra (TELSTRA 6% 8 April 2013 XS0356725084), the Australian domestic and international telecommunications provider. It boasts a diversified product suite and a strong balance sheet.
Lastly, we like a euro-denominated bond from GSK (GSK 4.85% 15 May 2013 US377372AC16), the pharmaceutical giant. Again it operates in a sector that offers solid defensive characteristics and decent cash flows.
All the bonds have an expected period total return to 31 December 2010 of between 3.3% and 4.8%. Moreover, the rise in interest rates and/or credit spreads that these bond can withstand before generating losses over the same horizon is between 1.3% and 2.1% (130 and 210 basis points respectively).
These total returns are not enormous, but they are superior to current deposit account rates. The risk element is also mitigated by the issuers' longstanding reputations, balance sheets and credit records. The risk-reward profile should therefore be acceptable to a conservative investor.
Looking ahead, the storm clouds of slower-than-expected recovery, continuing high unemployment and also the threat of inflation loom on the horizon. With this in mind, our selection is firmly based on the safety-first principle.
