Fixed Interest

With gilts under pressure and credit spreads so narrow, these are difficult times for fixed-interest investors. However, Gartmore is showing that fundamental credit research can add value even when overall market conditions are difficult.

Karl Bergqwist and Simon Surtees, Co-Heads of Fixed Income at Gartmore, look for specific catalysts to credit spreads widening or contracting and seek to gain a profitable exposure to these events. This strategy paid off handsomely in May, when the sub-prime mortgage lender, Kensington Group, agreed to a takeover bid from the international banking group, Investec.

Over the month, the Gartmore Corporate Bond Fund, Gartmore High-Yield Corporate Bond Fund and the Gartmore SICAV Sterling Corporate Bond Fund, which each hold a position in Kensington, delivered returns comfortably in the top-quartile of their respective peer groups.

Simon Surtees explains: “Kensington Group’s bonds, because they are subordinated and because they were issued by a company operating in a relatively high-risk area, have traded in the past on a spread in excess of 300 basis points over risk-free government bonds.

However, the spread on Kensington’s bonds tightened in to just 120 basis points on news of the takeover, to reflect the superior credit quality of Investec (investment grade, “BBB”-rated). In price terms, this translated to a 5 per cent rise in the value of Kensington’s bonds.”