High single digit returns predicted for 2010 by major fund managers

News - Funds

Written by Ray Clancy

Friday, 09 April 2010 10:00

Fund managers believe high yield offers the best risk adjusted returns in 2010 as investment grade credit is more susceptible to interest rate risk and equities priced for recovery, it is claimed.

‘High yield continues to look favourable with most managers forecasting high single digit returns for 2010, with yield, rather than capital appreciation driving most of the total return this year,’ said Standard & Poor’s Fund Services lead analyst, James Mashiter.

Mashiter points to Anthony Robertson, manager of the BlueBay High Yield Bond Fund, who takes the consensus view that high yield is being supported by improving fundamentals and strong technicals.

Robertson believes that the asset class would be able to keep pace with equities in a V-shaped recovery but would offer much better downside protection should growth disappoint. He argues that default rates should continue their downward trend, buoyed by a better earnings outlook and broader access to capital.

Most managers, including the team at Goldman Sachs Global High Yield Portfolio, expect security selection to be crucial as the market discriminates more between stronger and weaker credits. ‘Managers agree that performance will be more alpha-and less-beta driven, with spreads at more normalized levels,’ said Mashiter.

Despite the loss in momentum in high yield in late January and early February due to Greece'’ debt problems, some managers do not see this as a material threat to the improving fundamentals and strong technical bid.

Fidelity’s Harley Lank and Invesco’s Peter Ehret used this market correction as a buying opportunity, favouring low duration issues. Ehret has also reduced some subordinated financials exposure and rotated into consumer cyclicals.

Conversely, New Star’s James Gledhill cautions that recent economic data has been more mixed. This together with sovereign debt concerns in the eurozone and continued tightening of Chinese lending may cause some uncertainty in the near term, he says. Gledhill expects twelve month default rates to fall sharply as the high default months fall out of the annual figures.