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Milton cuts high-yield bond exposure

Miton Investments has reduced exposure to high-yield bonds within its income fund of funds.

In common with fund management groups such as Jupiter and Abbey, Miton believes high-yield bonds are starting to look unattractive.

The fund firm believes that yields are no longer offering investors adequate compensation for the extra risk they are taking relative to Government bonds.

Consequently, the CF Miton extra income portfolio has sold its holding in the Aegon optimum income fund.

The bulk of the Aegon fund’s portfolio is invested in high-yield bonds, a strategy which has worked well for Miton during the past 15 months. Over this period, the Aegon fund produced a return in excess of 17 per cent.

Although the high-yield market outperformed last year, benefiting form historically low default rates, steady economic growth and low interest rates, investors have had to invest further down the credit spectrum to find higher yields. This has increased demand which has pushed up valuations.

The concern is that bonds are now looking overvalued, with less scope to reward investors sufficiently.

Miton noticed the changing outlook for high-yield bonds at the beginning of the year and has increased the cash weighting of the extra income portfolio to 10 per cent.

The company believes this has been a good move in the light of the recent sell-off in bond markets as a response to a General Motors profit warning.

Miton fund manager Tom McGrath says: “Reducing our exposure to high-yield bonds is just a bit of risk aversion.

“The high-yield market has had such a good run but the extra spread over government debt has narrowed. We just wanted to take the heat out of the portfolio and build on a demand for cash.”


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