Holly Cook: Welcome to the Morningstar series, 3 Stock Tips. Joining me today is Gareth Isaac. He is manager of the Schroder Strategic Bond Fund, so we are actually going to be looking at interesting areas of investment in the credit markets.
Gareth, thanks for joining me.
Gareth Isaac: Hi.
Cook: So, why don't we start off with your first area of opportunity in the credit markets? What's number one for you?
Isaac: Well, I think that there are numerous opportunities in 2014 and beyond in the government interest rate markets. 2012 and 2013 were very strong years for peripheral markets and credit markets, and there were fantastic opportunities there. I think if you look at those markets much of those returns have now been made, and I don't think we’re likely to see spreads contract much further from this particular point.
I do think there is a little bit more value in terms of government bonds and relative value between government bonds. I think in 2014 we will see the differentiation between economies of the diverging, like the US and the UK versus that of Europe, and I do think that there are interesting opportunities of relative value trades between Europe and the US.
Cook: Okay. And so what would be your sort of second area of interest that you think is worth looking at?
Isaac: Well, I do think that despite the fact that much of the gains have been made in the high yield market, we still quite like individual stocks within that area. We have reduced the high yield allocation in the portfolio quite dramatically over the last six months or so. But I do think there are some areas of interest. We still like the cable companies, UPC and Virgin Media, and Telefonica in Italy. We do like some of the consumer cyclicals because we do feel that real wages are going to begin to rise in the UK and the consumer confidence is going to improve.
So, we like companies like New Look and Boardriders and also the banking sector as well. We still have some exposure to subordinated debt in the banking sector in Europe, although it's a lot less than we have had historically.
Cook: Well, some very interesting credit names for us there. And so what would be your third area of interest?
Isaac: Well, I think an interesting area that we have been allocating capital to recently, which I think is probably off the radar for some people, is the US municipal market. Now, 2013 was a very difficult time for the US municipal market. There were big bond outflows, there were very bad press news because of places like Detroit, but they did represent incredible value. And we worked very closely with our US team and they highlighted to me that there were significant opportunities within the US muni market.
So we built up a position of about 10% of the portfolio value there, investing in idiosyncratic names across the US muni market and they performed very well for us. And despite the yields rallying quite significantly over the last sort of six to nine months, we still think there is still value there as we move through this one into 2015.
Cook: So that's actually an area that I know that a lot of US investors are very familiar with, but here in the UK it's not something that we hear very much about.
Isaac: Yes. It's quite a tricky market. There is taxable and non-taxable and it's quite an idiosyncratic market. So, it's not an area that would naturally be an investment opportunity to UK investor, which – I have the benefits of having a very strong team in the US and they highlighted this particular investment strategy for me and we've decided to allocate to that.
Cook: Well, Gareth Isaac of Schroder, thanks very much for joining me today.
Isaac: Okay. Thank you.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
