Downbeat Pattullo looks outside the box

Henderson Strategic High Yield Bond fund manager John Pattullo says high-yield bonds will continue to perform well in the first half of this year. Merrill Lynch’s ML GBP High Yield index jumped almost 40% in 2003, according to Standard and Poor’s. The performance of A-AAA rated investment grade corporate bonds was dull – the ML Non Gilts AAA-A index rose about 5% last year. But Pattullo, who is now holding 80% of his portfolio in high-yield, says: “The market outperforms between November and May. The second half is the hard time.” The fund manager says institutional buying will support the market. But he will reduce his holding of high-yield paper towards the middle of the year. It could be bought down by “quite a lot”, he adds. Overall Pattullo is downbeat on bond markets. He says: “Interest rates are rising so if you hold government bonds you will make a capital loss. In the previous three years you have had the opposite situation and that is why corporate bonds have had a good run too. The free lunch of falling interest rates has gone.” The fund, which was known as Henderson European High Yield Bond fund before it was given a wider remit last November, holds no gilts. Cash holdings account for 5%, and another 5% is in investment-grade paper. Given his downbeat view of the fixed interest market, Pattullo believes managers need to be more creative. His fund can also invest in convertibles and preference shares. At present 10% of the portfolio is in convertibles. He says: “You have to look outside the box at assets like preference shares.” Of the change to the fund’s remit, Pattullo says: “The European high-yield market, which was only born in the mid-1990s, has not developed as quickly as we originally expected.” The collapse of telecommunication companies, which he says dominated the market, the September 11 terrorist attacks and corporate accounting scandals, made it difficult for companies to issue paper because of investors’ reluctance to buy it. The fund manager says: “The European high-yield market has remained relatively small. It is but an eighth of the size of the US high-yield market, the world’s largest. The market lacks the necessary breadth and depth for a diversified investment portfolio.”