By Tom Burroughes
LONDON, Nov 14 (Reuters) - The head of Britannic Asset Management's UK retail corporate bond fund says he is looking to take profits from auto and telecom bonds, eyeing a switch to European bank debt over the coming months.
David Roberts, head of credit at Britannic and manager of its 370 million-pound ($625.1 million) bond fund, said corporate bonds in the carmaker, telecom and insurance sectors have enjoyed strong gains but it is now time to move on.
"There is less value in these sectors than there was 12 months ago. We are now playing close attention to European banks at the moment, particularly those issuing (bonds) in sterling," Roberts told Reuters in a telephone interview.
Corporate bonds such as telecom debt have rallied strongly in recent months. The spreads between corporate and government bond yields have tightened sharply since the start of 2003, coming close to an all-time low.
The FTSE Euro corporate Bond Index , for example, showed investment grade bonds in euros yielding an average of 63 basis points on Friday, compared to the 134 basis point premium at the start of the year.
Against this background, Britannic's Roberts said it was time to reshuffle his portfolio.
The fund mostly holds investment-grade bonds, although it can hold a small portion of sub-investment grade debt, and up to 15 percent of all assets in non-sterling debt.
Roberts is aiming to extend the 13-year-old fund's strong track record. Over five years, it gained by 40 percent, beating the global bond sector average rise of 8.56 percent, according to the fund research company Lipper.
THE 10-YEAR SHIFT
Across bonds as a whole, Roberts is looking to exit the short and ultra-long end of the bond maturity spectrum, which he says may be vulnerable to interest rate rises and possibly higher inflation. He favours pushing into the 10-year yield sector.
Ultra-long bonds typically refer to debt with maturities of 30 years or more.
Roberts says there is still value to be had holding bonds because sterling money markets are pricing in an excessively sharp rise in British official interest rates after the recent rate rise by the Bank of England.
"Over 2004 we will still get a bit of capital gain because markets are a bit ahead of themselves in how far interest rates are going up in the UK," Roberts said.
Short sterling interest rate futures are pricing in official interest rates at over 5.0 percent by the end of 2004, while Roberts' colleagues at Britannic are aiming for an official repo rate of between 4.50 to 4.75 percent.
His fund is overweight of short-dated and ultra-long bonds, and neutral of medium-dated bonds.
Britannic Asset Management (BAM) is the wholly-owned subsidiary of UK life insurer Britannic plc .