Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Nicola Marinelli, fund manager at Glendevon King Asset Management.
Yields on some government bonds have approached the record low levels seen in the aftermath of Lehman Brothers' demise. For example, the yield on a ten-year gilt is 2.98%, versus 3.63% just a year ago. On the ten-year German bund the yield has reached 2.33%, compared with 3.23% a year ago. So many commentators are warning of a bond bubble that will soon burst yields will be pushed much higher and there will be significant capital losses for bondholders. Others, however, are saying that the bond market is simply pricing in the effect of another recession. And they add that judging by what's happened in the Japanese market since the 1990s, there is no serious collapse in bond values on the cards.
Nonetheless, corporate bond spreads are currently still quite high compared to their historical average. This is probably due to two effects. Firstly, very low government bond yields. There is probably a minimum level of absolute yield that investors require to hold a risky asset independent of the benchmark gilt rate. So when the benchmark yield keeps falling, and corporate bond yields do not follow suit, the spread between the two increases.
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The second effect is easier to understand. In the face of the uncertainty over economic growth following widespread tighter fiscal policies, high unemployment rates and the unresolved issues of bank capital, investors demand a higher-than-average spread to hold risky assets. Sovereign risk remains a further source of concern. It was, after all, only last April when Greece was in the news for near-default. And in the last couple of weeks spreads on Irish government bonds have again been under pressure.
In this environment, a reasonably safe bond portfolio should include relatively short duration bonds issued by companies that will suffer less if sovereign risk does resurface. Here are three. The first two require a minimum investment of £1,000 and the third €1,000.
The telecom sector's risk/reward profile looks compelling. Telecom companies offer a larger spread than, say, chemical, oil or food and beverage companies, which show similar, or worse, debt to equity ratios.
BT Group reported slightly better than expected earnings before interest, tax, depreciation and amortisation (EBITDA). It has also been able to generate strong cash-flows, helping the company to lower its net debt position. I'd buy British Telecom 8.5% 7/12/2016 (XS0123682758), priced in sterling.
Insurer Aviva has been able to beat analysts' estimates at the top-line level and, generally speaking, all its lines of business have shown good improvements. The company is on track to deliver a good 2010. While its regulatory capital position has deteriorated slightly, in my view this is not a real cause of concern. Go for Aviva 5.902% perpetual callable 27/7/2020 (XS0206511486), also priced in sterling.
Bertelsmann is a diversified media company with investments in televisions, radios, magazines and books. It has recently reported strong results for the first half of the year. Better still, the ratio of net debt/EBITDA is now 1.2 times (down from 1.9 times in 2007). Although further short-term improvements are unlikely, we do not expect aggressive mergers and acquisition activity. The company should also retain, or improve, its credit rating. Go for Bertelsmann 7.875% 16/01/2014 (XS0408678133), priced in euros.
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