Denmark’s AP Pension is increasing its investments in high-yield corporate bonds and has appointed Babson Capital Management as its manager for global high yield.
The DKK96bn (€12.9bn) labour-market pensions provider said yields on high-yield corporate bonds in the US and elsewhere had risen so much that it was now turning its sights towards this fixed income sector.
Ralf Magnussen, investment director at AP Pension, said: “We think high-yield corporate bonds, particularly in the US but also in Europe, are an attractive investment.”
He said the instruments were now giving high returns in relation to the risks they presented.
“This is because the prices on high-yield bonds are based on a somewhat higher risk of recession than we believe there are grounds for,” he said.
He said AP Pension had appointed Babson Capital Management as its new manager for global high yield, and that the pension fund had so far invested DKK1.5bn in this asset class via the new manager.
“We have not taken a decision on whether we want to invest more currently,” he added.
Of AP Pension’s DKK96bn in assets under management, around DKK18bn is invested in credit bonds.
“We have currently placed more than DKK7bn in high-yield bonds and are overweight compared with our strategic benchmark,” Magnussen said.
He said he expected the bonds to produce an annual return of 6.5-7.5% with the right manager.
“It was important for us to chose a manager that had traditionally captured rises in the market,” he said.
Corporate bond yields have been rising partly because of developments in the US energy sector, AP Pension said.
Many businesses in this sector have been raising finance by issuing high-yield bonds, it said, but many have been hit hard in the last few years by falling oil prices, scaring some investors away from their bonds.
This has increased yields to a level where they represent a good potential investment, the pension fund said.
“We are on the lookout for investments that can supplement low-yield bonds and equities, which are experiencing high volatility at the moment,” Magnussen said.
“At the same time, we must have control over the risk in relation to the time horizon we are investing in.”
He added that AP Pension believed high-yield corporate bonds enabled this control.
Magnussen said Babson typically picked corporate bonds with around five years to maturity.
Up to now, AP Pension has mainly had a shorter duration on this type of investment, at between one and 1.5 years.
Babson is soon to be re-branded under the Barings name as part of recently announced plans by its parent MassMutual.