Cazenove manager ups risk with high yield

26 June 2012 | By Beth Brearley

Harvey says a clear indication of these low prices is the Itraxx Crossover index, an index of European sub investment grade credit default swaps, which recently peaked at 750 basis points.

The manager has bought high yield bonds in the UK’s largest care home, Four Seasons Healthcare - which was recently acquired by Terra Firma, and Sappi, a world-leading manufacturer of paper.

“We reduced risk in February and March and have added it back in June,” Harvey says.

“We are trying to buy high and sell low in terms of credit spread.

“We believe that credit spreads will remain elevated over the coming months, but as the Itraxx Crossover pushes north towards 800 basis points, we are happy to add risk,” he adds. (article continues below)

The manager says he has seen some success in trading high yield bonds so far this year, with the fund up 5% year to date.

“We target Libor plus 3% and we are well ahead of that target,” he says.

These purchases have contributed to the average life of the fund increasing from 4.2 years to 4.4 years.

In response to the Moody’s downgrading of banks credit ratings last week, Harvey says it was widely anticipated and the following day the Itraxx Financials Senior index was completely unchanged.

“The downgrades were very well flagged by the market and in most cases the credit has remained at investment grade level, with the exception of RBS lower tier 2 debt which was downgraded to junk.”

Over the year to 22 June the fund is up 1.31% against the IMA £ Strategic Bond sector average of 4.64%, according to Morningstar.

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