Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Sajiv Vaid. He is manager of the Fidelity MoneyBuilder Income Fund. Hello.
Sajiv Vaid: Hi, Holly.
Black: So, you haven't got three stocks for us today. Obviously, you're a bond man. So, you've got three bonds for us. Where would you like to start?
Vaid: Before I talk about stocks, maybe a sector that I think really warrants a little bit more interest, and that's the asset-backed market. The broader investment grade market has retraced nearly 90% of the widening we saw. But when we look at the asset-backed market, it's only about 70%, and that's an area that I think really the fund is focusing on. We think there's a lot of value in that. And relative to the broader market, it's at its 10 year rise. So, that is an area I see a lot of value.
And when I think now as you said about speaking bonds, the one area, not surprisingly, is names that have been impacted by Covid, i.e., right in the center of the storm. And the one highlight is actually Heathrow. So, obviously, we all know why they've suffered. Passenger volumes have collapsed by 90%, revenue has as well. So, what is the attraction as a bondholder? Well, first of all, it's a key infrastructure asset, and I have no insight into how the virus may play out and when travel may come back. But as a bondholder, I can invest on a senior secured basis. And that means that I have a charge, a fixed charge and a floating charge, on its assets. And that is really important given that I have no visibility on the headwinds that they face. But I have some protection not only from the security but also financial covenant protection. And these bonds yield nearly 3%, which I believe for medium to long term investors, that is actually very attractive.
Black: So, if all goes wrong, you get a little bit of an airport is what you're saying?
Vaid: We think.
Black: So, what is bond number two?
Vaid: Bond number two is a multinational utility coming called EDF. It trades really wide relative to its peers and for a good reason. They've had cost overruns and the balance sheet is levered. And while those are really reasons why they should trade wide, I think there's some real positive catalysts to come through and that basically is with regards to some reform of power subsidies which should improve its balance sheet. But there's also a move towards splitting the company between green energy and nuclear energy, and the bonds will migrate to the good parts of the business, which I think will be a real catalyst for EDF to outperform, and that's not really medium maturities, more the longer dated maturities. But I think there's a greatest value. And with a 6% coupon and its owned 85% by the French Government, I think the risk/reward is really quite attractive.
Black: Okay. And what is our final bond today?
Vaid: My final one is more about a development we've seen within government bond markets, and that's the amount of issuance in green bonds. And as an investor in these types of assets, I think it's really an important development, but I think we've got to be really careful not to be buying green bonds at any price. So, while we understand the importance of green bonds, I think one of the things we have to also understand that actually because there's a scarcity of names and scarcity of sectors, we're overpaying for some of these bonds. So, a good example is VW. They issued a green bond and it actually came 10 to 15 basis points inside a non-green bond. And if you think about that, is that the right sort of optimal struck capital? And I would argue not, because when you look at VW, as a business, they are one of the more aggressive in in terms of electrification. They're spending 30 billion on platforms for electric vehicles. By '24 they want 25% of their sales be EV. They are – already their DNA is changing. You don't need a green bond to tick a box. You need to look at companies in terms of its overall activities and not a small sliver like a green bond.
Black: Sajiv, thank you so much for your time. For Morningstar, I'm Holly Black.
