Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Bryn Jones, investment manager, Rathbone Ethical Bond Fund.
Although we expect inflation to fall back in the short term, there does seem to be an upward trend in price pressures longer term, and we see interest rates rising to between 5.75% and 6% by the end of the year. The UK economy is likely to remain strong over the summer, but then slow in response to a weakening US economy. We think gilt yields will peak over the next 12 months, prices will become competitive and we will look to take advantage by buying the longer-dated bonds as they get cheaper.
We still don’t like longer-dated corporate bonds in general at the moment because investors seem to be paying too much given the extra interest rate and default risk involved. For the time being we prefer to wait for prices to drop before buying. Overall, we have largely limited our exposure to lower-risk AAA bonds (the highest rate of corporate debt available) with relatively short (sub-15-year) maturities.
We like Amlin (2026), a very well-run Lloyd’s insurer, and have been buying their Sterling bond. The price has been rising recently, but it still remains undervalued. The company earns income by writing and selling insurance from Bermuda and will look to raise future premiums. A recent AGM (annual general meeting) statement from the confirmed that business is showing solid growth, despite some concern over increasing competition. Amlin’s investment returns have recently been hampered by rising interest rates in the UK. However, in the longer term, we think the management team is capable of delivering strong returns. Although insurers generally earned more in premiums than they paid out in claims last year, we are monitoring the sector closely ahead of hurricane season. Amlin yields 6.98%.
We bought Friends Provident (2015) when it was first issued back in 2006 at an attractive price. A lack of supply created pent-up demand for this bond, and it performed strongly from the start as a result. Subsequently, the company has issued healthy new business figures and this has given us the confidence to add to our holding. Should recent takeover speculation over the group result in a deal, any resultant improvement in their credit rating would also provide a boost for the bonds. Friends Provident yields 6.81%.
In April 2006 we bought into our first euro-denominated bond issued by CRC Breeze Finance (2026), a business that finances wind farms in Germany and France. Breeze currently backs 39 windfarms, generating 340 megawatts of energy from 185 turbines. With interest rates expected to rise in the eurozone, we remain confident in the strength of the euro in 2007. Breeze yields 5.65% in euro terms.
Co-operative Bank (2021) came to the market at an attractive price relative to its peers (reflected in a 1.1% spread over gilts) and with a strong ethical story. Recent figures were disappointing due to higher than expected bad-debt charges and other costs. However, the company has since confirmed that write offs should now reduce, which suggests that the worst may be behind it. We think their problems have been overplayed and the bonds look cheap at the moment on a yield of 6.27%.
Finally, despite our overall preference for shorter-dated bonds, we have selectively added long maturity AAA-rated assets to our portfolio, such as Bishopsgate Asset Finance (2044). This is our longest-dated bond issued by a business which aims to develop mental health facilities in Birmingham. Again, this is a compelling investment due to its strong ethical theme and we have been buying while the price remains attractive. The bond yields 5.25%.