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Julian Gibbs

The Enron, Energis, Railtrack and NTL affairs have made many investors ultra-cautious about investing in high-yield bonds.

However, the default rate on some investment-grade bonds worldwide peaked at 10.7 per cent in January and fell to 10.5 per cent in February. Moody&#39s, the rating agency, predicts that the default rate will decline to 7.4 per cent by the end of the year and to 6.6 per cent by February 2003.

The market is still priced at a default rate of 16 per cent, not just for this year but for each year until the bonds mature, considerably overcompensating for any actual risk. Furthermore, about 85 per cent of all defaults are in the US.

Probably the best fund to take advantage of this situation is the M&G high-yield corporate bond fund managed by the highly experienced David Fancourt. He is ideally positioned to take advantage of a bull run in high-yield bonds because of the fact that his fund invests solely in corporate bonds with no preference shares or quasi equity securities at all.

The manager is very selective in the new issues he buys. In fact, out of 36 new issues launched last year, he only bought 10, of which only one fell in price.

The average price performance of the bonds which he bought as new issues was a rise of 3.5 per cent against a loss of 18.2 per cent on the bonds he did not buy.

The recent past performance of high-yield bond funds should be ignored. It should, however, be remembered that when the default rate peaked at over 10 per cent in 1992, the high-yield bond market performed extremely well later that year, rising by around 40 per cent, and also performed well in 1993 and 1994.

With the recovery in the US well on the way, I believe that the M&G high-yield corporate bond fund is now one of the best and safest investments for the next year or two.

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