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Dutch schemes unfazed by high yield worries

NETHERLANDS - Dutch pension funds aren't worried yet about gloomy predictions on the future of high yield corporate fixed income investments, they have made clear.

"Downturns are part of the market mechanism, and we are in it for the long term," said Roland van den Brink, chief investment officer of the €21bn industry-wide pension fund for the metal and electro-technical engineering industry (PME).

"Six months ago, there was a hiccup, and the investors who sold then have either missed performance on the way up, or have had to pay a lot for getting back in again. It might have cost them 2% of the bonds' value," he pointed out.

Van den Brink's comments were made in response to predictions by some US credit specialists who argue strong returns from high yield debt are nearing their end.

"If there is an economic downturn, the number of business that go bust will shoot up from 1% to 9%. In that case, the financing of takeovers through loans will stop," Thomas Lee, the founder of Thomas H. Lee Partners, added.

According to Van den Brink, the market for high yield debt - also known somewhat negatively as junk bonds - is not as liquid as the equity sector, for example.

"We would not be able to sell our junk bonds within a week. And it would have a negative impact on the price anyway," he explained. PME has invested between 5% and 6% of its assets in high yield corporate bonds, he said.

"After all, junk bonds have yielded extraordinary returns of 8% to 9% during several years," PME's CIO added. "And since state bonds are showing a similar downward trend, there is no real alternative."

PME has not instructed its asset managers to adjust high yield debt positions, Van den Brink made clear. "We hope that they can limit the damage, in the case of a bursting bubble."

ABP, the €221bn civil service pension fund, isn't worried either about its position on high yield bonds, as the scheme's asset managers prefer to call them.

"Yes, we have exposure to high yield bonds and bank loans, and we think the present spreads are too low," ABP's spokesman Thijs Steger acknowledged.

"But as a pension fund we take a long-term view on this market. A well spread portfolio in the asset class will probably yield more than risk-free investments," he added.

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