"Companies have been very prudent in managing the maturity profile of their debt with very few re-financings to be carried out in the near future. Balance sheets remain strong and leverage ratios remain historically low," he explained.
"The default rate for US high yield finished 2011 at 1.5 per cent, falling below 2 per cent for the second year running. Both S&P and Moody’s are forecasting a slight rise in default rates but to remain well below their long term average of 4.5 per cent."
The manager also thinks that high yield corporate bonds are offering better yields than the rest of the bond market.
"Major government bond yields have remained near their historic lows, making – in our opinion – the high yield asset class a more compelling investment proposition. We also expect that the uncertainty surrounding the European situation will continue to cause volatility in financial markets and risk assets in particular, thereby presenting further opportunities for high yield investors."
"Investors are not being rewarded to be in the low yielding government debt products. Yields on ‘safe haven’ fixed income assets such as 10-year US Treasuries and 10-year UK gilts remain very low, at around the 2 per cent mark. In contrast, the yield to maturity or average redemption yield on US high yield bonds stands at 7.6 per cent and in the European high yield bond market at 8.4 per cent."
The gross redemption yield on the Baring High Yield Bond fund is running at 7.8 per cent.
Ugurtas has recently used the portfolio's cash holdings to buy a number of US dollar-denominated high yield corporate names.
"The new securities cover all ratings within the high yield credit spectrum, and we concentrated these additions in sectors such as energy and basic industry. We think the sectors should perform well in an expanding economy."
The Baring High Yield Bond fund remains concentrated around B-rated issuers, with just 7.3 per cent exposed to CCC-rated firms.
"We maintain our ‘zero default’ focused strategy at all times and we continue to favour companies with strong balance sheets priced to offer value relative to their sector, rating and market," Ugurtas finished.
Performance of fund since launch vs sector
Source: FE Analytics
Since its launch in 2003 the fund has returned in excess of 80 per cent, while its IMA Sterling High Yield sector has returned 72.6 per cent.