Alanna Petroff: We just wrapped up our annual Morningstar Investment Conference, where we had a number of speakers take the stage. John Pattullo was one of those speakers. He is head of fixed income at Henderson Global Investors. He spoke in particular about the global economy and what that means for bonds and high-yields bonds. So when I did get to sit down with him one-on-one, here is what he had to say.
Petroff: What do you think about the current economic situation right now?
John Pattullo: Well, it's mixed and it's mixed between the States and Europe, and it's mixed within Europe. So the core of Europe, Germany is actually growing pretty well. The periphery is shrinking pretty fast. So you can't look at the aggregate economic European number, because it's meaningless.
The States is growing probably about 2% a year, which is subpar, but it's better than where it was. There are signs of pickup in the demand for credit in America, so they supply credit into the markets, into the banks. There is now evidence of some pickup for corporations wanting to borrow money and individuals being more relaxed about borrowing money as well.
Petroff: Do you think that we'll see that in Europe anytime soon?
Pattullo: No, and I think this is the biggest problem for [the ECB] president Draghi. So, he supplied lots of money with LTRO into the European banks. The money is there, but so far there isn't much evidence that individuals or corporations want to borrow the money irrespective of the price of money otherwise known as interest rates. And I think that's the biggest difference between America and Europe. As you know, there's different economic policies being applied to America and Europe and that's kind of where we are.
Petroff: So, with this in mind, where are you putting your money right now? How does that impact your investment strategy?
Pattullo: Yeah. We are very much focused on the middle of the credit curve, so very much in BBB to bottom end of investment grade and top end of high yield, which is BB. And we have got some single B noncyclical, high yield names as well. We don't like cyclicals. We don't like CCC which are highly leveraged businesses. All those assets are really in the core of Europe, so the centre of Europe, really Germany and Netherlands and so on.
In addition, we hold some American bonds and a lot of British bonds as well. We haven't really got hardly any exposure at all really to the periphery and the periphery is growing obviously being Portugal, Ireland, Italy and Spain. And so we just don't think we need to go there to chase yield. There's plenty of yield we can have in businesses like Kabel Deutschland which is like the Virgin Media equivalent in Germany. Cable TV business, great business, highly cash generative. Well, why don't we just buy that and knock out 5%, 6% yield? It just seems much more sensible, and that's why we call it sensible carry for the economic outlook.
Petroff: For a full write-up about his ideas on fixed income and high-yield bonds, see the link below this video.