There are three reasons investors should not be afraid to up exposure to Spain and Italy, according to Henderson’s head of fixed income Phil Apel.
At the end of March, Spain and Italy each represented 3% of his €634 million Henderson HF Total Return Bond fund, having had no representation in the fund at the end of 2013.
‘One of the changes we have been making is we have been building up an allocation, over the last couple of months to the European peripheral debt; so the debt of Spain and Italy,’ he said.
‘What has been driving that has been we have looked at three factors to consider whether a country is solvent and likely to remain that way going forward.’
The three factors Apel said he had been focusing on are: deficit excluding interest payments; interest payments; and growth of nominal GDP.
Both countries had performed well on these measures, said Apel, but he was under no illusion that further work needed to be done.
‘Spain and Italy have done enough to stabilise their debt-to-GDP levels, albeit those levels have stabilised relatively high, so the patient is still acutely problematic but no longer critical because it is stable.'
‘We felt that meant it was able to drive the bonds to trade as safe haven assets rather than risk assets and that would allow us to increase the yield of the portfolio but also the diversity. Because having more government bonds in the portfolio helps to offset corporate bond exposure in the portfolio.’
Apel is one of a seven-strong investment committee which oversees the Henderson HF Total Return Bond fund. This includes Kevin Adams, James McAlevey, Colin Fleury, Stephen Thariyan, Bill McQuaker and Joanna Murdock.
The Henderson HF Total Return Bond fund has returned 9.82% over the 12 months to the end of April 2014. This compares to a 2.9% return by the average manager in the Citywire Bonds – Global sector over the same period.