Pru has hedged all of its high yield bond exposure and 25 per cent of its investment grade corporate bond holdings -equivalent to £4bn- as part of a wider move to “de-risk” the portfolio.
Investment director Martin Brookes says he believes the outlook for corporate bonds is deteriorating after a benign six years for the asset class with credit spreads set to widen over the medium-term.
He says: “We now feel that given the amount of leverage brought to transactions and cov-lite loans, credit could be moving into more difficult times and we are now protected against this.
“A lot of excesses have been seen in private equity and we need to unwind that. Over time it is inevitable that the pace of the private equity market will slow.”
Derivatives markets are already pricing in a further widening of credit spreads but this has been slower to translate into the underlying bond markets.
Brookes says his main concerns are around the massive growth of the leveraged loans market with several banks now struggling to offload this risk.
Brookes is more upbeat about the gilt market and has moved £1bn into the asset class to benefit from improved yields following the recent rate rises.
Much of this cash was switched over from its Asian exposure, as a result of profit-taking from Singaporean and Australian holdings. The fund remains 55 per cent invested in equities, compared to 53 per cent at the start of the year and Brookes say he is comfortable with stockmarket valuations. He says Asia, Europe and UK continue to look attractive although he believes the US is fully valued.
Commercial property continue to make up around 15 per cent of the fund after Pru reduced its UK commercial property exposure last year.