EUROPE – The size of corporate bond issuers’ pension liabilities is an important consideration when choosing to invest in bonds, says Bob Michele, global head of fixed income at Schroder Investment Management.

Explaining the house’s fixed income strategy for 2003 to IPE Newsline, Michele said that several key factors must be considered when picking corporate bonds. On a macro level, transparency of balance sheet and commitment to de-leveraging are two issues that Schroders analyses.

At an issuer specific level, it considers pricing power and rational debt coverage ratio. Schroders is also suspicious of companies that are failing to improve their pension deficits; it’s also wary of companies using asset-backed transactions to pay off company debt. “We want to see companies making progress on their pensions liabilities, and improving their circumstances.”

Schroders IM is unwinding its positions in corporate bonds and high yield bonds following a four-month rally for the asset classes, but will hold on to paper from companies that comply with its “wish list”.

Looking forward, Michele believes that “for choosy investors, the high yield market should perform well this year”.

“We are still a little worried about the high yield sector and we still see room for industry groups to fall into high yield, but it won’t be as bad as last year.”

Michele is predicting that the auto supply sector along with airlines and their affiliates will join the growing ranks of “fallen angels”. “As autos face downgrades, they will look to their suppliers in order to cut costs which is going to place pressure on those companies,” he explains.

As for the inevitable question of equities versus bonds, Schroders’ house view is that equities will outperform in 2003, but “for the first half of the year, it’s a toss up,” says Michele.

Schroders IM employs around 70 in its fixed income business globally, with a 15-person credit team operating from London, New York, Singapore, Tokyo and Hong Kong. It manages 20 billion pounds in fixed income assets globally on the behalf of pension funds, institutions, retail clients and private clients.