High Yield Corporate Bond prospects look solid for ‘07

After a strong year for high yield debt in 2006, Simon Surtees and Karl Bergqwist, co-Heads of Fixed Income at Gartmore, believe the outlook remains positive. “Although there could be a period of consolidation in the short-term, we don’t see any catalysts that are likely to cause spreads to widen drastically over the next year,” say Simon and Karl.

“Assisted by ample liquidity in capital markets, which underpinned high volumes of new issuance in Europe, high yield corporate bonds in general performed well last year. Company balance sheet and financial strength remain strong at present and the historically low levels of corporate default experienced in 2006 are not expected to increase materially during the coming 12 months. Indeed, the availability of cheap financing and the market’s risk appetite have allowed many weaker borrowers to refinance and extend debt maturities, further limiting the scope for a short-term rise in default rates.” Simon and Karl took on the management of the Gartmore High Yield Corporate Bond Fund in May last year. Over the last nine months, the Fund outperformed the IMA UK Other Bond Sector average by a healthy margin, returning 5.8%, compared to the sector average of 2.7%. This puts the Gartmore High Yield Corporate Bond Fund in the top decile of its peer group over this period, and in top quartile position over one, two and three years¹.

“The Fund’s outperformance can be attributed to a number of changes implemented since May. For example, the decision to increase the Fund’s high yield component from around 50% to as much as 80% or 90% has been very successful. Our ground-breaking use of Credit Default Swaps (CDS) has also been beneficial, in particular our positions in short-dated CDS referencing the US automotive manufacturers worked well. Ultimately though, our success, which we hope to repeat this year, is down to the combined expertise of our managers and analysts. We’ve recently expanded our team, with the appointment of Simon Cowie as a Senior Credit Research Analyst. He will specialise in credit intensive non-financial sectors and further advance our use of CDS technology, something which has already helped us to outperform many of our competitors.”