Expectations for declining returns from corporate bonds worldwide are leading Scottish fund company Baillie Gifford & Co. to invest more in Brazilian credit.
Company bonds will make less money in 2013 after four years of annualized gains of at least 15 percent for Robert Baltzer, a money manager at the Edinburgh-based firm, which oversees 81 billion pounds ($130 billion) and lists some of the largest U.S. retirement funds among its clients. He bought securities sold by Virgolino de Oliveira SA, sugar and ethanol producer in Brazil, and Rio de Janeiro-based Petroleo Brasileiro SA (PETR4), the world’s biggest producer of oil in deep waters.
“It would take a very bizarre combination of events to have the same returns,” Baltzer, 34, said in a telephone interview in the Scottish capital. “You are not going to enjoy the same returns as we have this year.”
Corporate bonds soared in the wake of the global financial crisis as governments around the world took the axe to interest rates to try to revive their economies and investors shunned stocks. Since the collapse of Lehman Brothers Holdings Inc. in September 2008, the Bank of America Merrill Lynch Global Corporate & High Yield Index has risen 44 percent.
Baltzer has run Baillie Gifford’s Investment Grade Long Bond fund since July 2004 and has co-managed the Baillie Gifford High Yield Bond fund with Donald Phillips since 2010. After four years of gains “we have found it easier to find sell ideas than buy ideas,” he said on Nov. 30. “We play a relative game, we are not trying to provide absolute returns.”
Baillie Gifford manages money for nine of the world’s largest 20 pension funds, according to its website. They include the California Public Employees’ Retirement System, the largest U.S. retirement plan. Other clients include Vanguard Group Inc., the world’s largest mutual fund company.
For the investment-grade fund, Baltzer bought the 5.375 percent sterling-denominated bond maturing in 2029 by Petrobras because “it is the linchpin of the Brazilian economy.” The yield on the bond was 4.89 percent yesterday.
For the High Yield Fund, he bought 11.75 percent dollar bonds maturing in 2022 issued this year by Virgolino, which is part of a co-operative group that is the world’s largest sugar cane producer. The yield has fallen 322 basis points, or 3.22 percentage points, during the past six months, to 12.13 percent yesterday, data compiled by Bloomberg show.
Another Brazilian holding in the fund is an index-linked government bond maturing in 2045 paying an annual coupon of 6 percent. It is the only index-linked bond in the fund and has been held since 2006. It is also owned across several other Baillie Gifford funds, he said.
“It is one of the most compelling opportunities we have found worldwide,” Baltzer said.
The Investment Grade Long Bond Fund, which is only available to institutional investors and has assets of about 260 million pounds, had a total return of 13.2 percent over the past three years, data compiled by Bloomberg show. It ranked second among 90 similar European-domiciled funds behind the Allianz Pimco Corporate fund, which returned 15.4 percent.
The High Yield fund is the best performer of 28 similar European-domiciled funds over three years with an annualized total return of 12.4 percent, the figures show.
Elsewhere, Baltzer also bought bonds issued by Delhaize Group SA (DELB) and Heathrow Airport Ltd., the owner of Europe’s busiest airport. He recently sold a holding in Intesa Sanpaolo SpA (ISP), Italy’s second-biggest bank.
“We have become more nervous and the market has become less nervous,” he said.
Bonds of companies in peripheral European markets have come back into favor, he said. That prompted the fund to sell holdings in Wind Telecomunicazioni SpA, Italy’s third-largest wireless operator, and Hellenic Telecommunications Organization SA (OTE), Greece’s largest phone company, Baltzer said.
During the financial crisis the high-yield fund bought investment-grade bonds issued by banks and insurers. The 295 million-pound fund continues to have about 20 percent of its assets in non-junk bonds, he said.
“We have cooled our interest in the banking sector, we have not owned as little as we do for quite some time,” Baltzer said. “We still see a significant amount of systemic risk in European banks. There is a limit to how much we want to bear.”
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