Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Rachid Semaoune. He is manager of the Royal London Global Bond Opportunities Fund.
Hello.
Rachid Semaoune: Hi.
Black: So, you're going to talk to us about three positions in the portfolio that you're positive on at the moment. Where would you like to start?
Semaoune: Well, let's start with Prudential, the large insurance company. The company, as you're probably aware, is splitting the U.K. business from the international business. And as a part of this demerger, they issued a few bonds last year in dollars and sterling with the option for the company to either allocate these bonds to the U.K. business or to the international business. And for the uncertainty the company had to pay up. So, within the Global Bond Opportunities Fund we're invested in the dollar bond issued by Prudential last year. It can be a very attractive coupon of 6.5%.
Black: ... which is a big coupon for such a big investment-grade company, right?
Semaoune: That's right. It's a very big coupon for a highly rated investment-grade company. And it was very, very attractive and it still is at the moment and the bonds have done very well because they are up nearly 18 points because of the attractive yield for such a low risk insurance company.
Black: Okay. And what is bond number two?
Semaoune: Bond number two is Vodafone. Everybody has heard about Vodafone. It's a large mobile company in the UK and around the world. Last year, they issued a bond which is what we call a hybrid bond. And the simple way to see what a hybrid bond is, is it's a bond which ranks below in light of payment to senior bond. So, they are slightly riskier, but you are being very well compensated for that level of subordination. And they issue that bond with a 7% coupon in dollars. Once again, for a company which has very predictable cash flow, very stable cash flow, it's a very, very attractive yield. And also, it yields a lot more than comparable highly rated bonds because the Vodafone hybrids rated BB+.
Black: Okay. And what's our final bond?
Semaoune: The final one is a bond which really highlight the true diversified nature of our Global Bond Opportunities Fund. It's a stock that is unrated. It's a Norwegian company called DigiPlex. DigiPlex owns and operate large data centers around Norway. And your main cost for data centres is power. You need power, you need electricity to cool them down. And the interesting thing about Norway is that power is extremely cheap and 100% of the electricity produced in Norway comes from renewable resources. And we like that characteristic because it makes the bonds very ESG, very environmentally friendly. And the company issued that bond with a 5.5% yield for the five-year maturity and the bonds are also secured on the data centres. So, you are getting a great yield, a great coupon, a great security package for high-tech assets without the rating, but you are being well compensated for the lack of rating.
Black: Why isn't that rated?
Semaoune: The company is not a frequent issuer of bonds. So, they only may be going to issue one bond, and then nothing for the next few years or for the next five years. And obtaining a rating for a smaller company can be very expensive. They don't need to.
Black: Do you like with that sort of issue that you know exactly how your money is being used, rather than maybe with Prudential you don't quite know what the bond money is going towards?
Semaoune: Yeah. This bond was issued in Norwegian krona. That was the currency denomination. And the fact that you know the proceeds are being used for a new type of bond, which we call ESG, very environmentally friendly, is very important for us.
Black: Well, thank you so much for your time.
Semaoune: Thank you very much, Holly.
Black: And thanks for joining us.
