Scottish Funds Buy Corporate Bonds, Keep Shares on Better Company Results

Scottish money managers are buying corporate bonds and sticking with stock holdings as companies report better results and government bond yields tumble.

Aegon Asset Management and Standard Life Investments in Edinburgh added to their debt holdings in recent months. Aegon expects stocks to rise in the second half of this year, while Standard Life is more pessimistic on equities.

“High-yield and corporate bonds can continue to offer a positive return, but I wouldn’t be surprised if equities did a little bit better than credit over the rest of the year,” said Bill Dinning, head of strategy at Aegon, which oversees 43.2 billion pounds ($66.5 billion) for clients.

Companies are posting higher profits and adding cash to their balance sheets even as the Federal Reserve, the European Central Bank and the Bank of England are predicting a weaker economic recovery than previously forecast. Corporate bonds are outperforming stocks as investors seek relatively safe investments that provide some return with government bond yields at record lows on both sides of the Atlantic.

Earnings for members of the Standard & Poor’s 500 Index may climb about 36 percent in 2010 and 16 percent in 2011, the largest two-year advance since 1995, according to the average analyst estimate in a Bloomberg survey.

‘No Double Dip’

Neither Aegon nor Standard Life expect economies in Europe and the U.S. to slip back into recession, in what analysts and investors call a “double dip.”

German 10-year government bond yields fell to a record 2.145 percent, two-year U.S. Treasury yields dropped to an all-time low of 0.454 percent and 10-year U.K. gilt yields declined to a record 2.847 percent yesterday.

“Clients are very interested in extending their corporate credit holdings,” said Andrew Milligan, head of strategy at Standard Life, which runs 143 billion pounds. “Demand has grown for global credit coverage. We have moved out of investment- grade credit into high-yielding, lower-quality credit as we don’t think the double-dip recession is going to appear.”

Standard Life manages about 26 billion pounds of credit, while Dinning said Aegon’s corporate bond investments stand at more than 10 billion pounds.

Investment-grade bonds in all currencies returned 8.4 percent this year, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. High-yield, or junk, notes returned 9.3 percent. That compares with a negative return of 4.7 percent from the MSCI World Index, a benchmark for stocks.

The average price-to-earnings ratio, a measure of how much profit a company makes compared with its stock market value, is currently at about 15, close to the lowest for a year.

‘Cheap Valuations’

“Valuations are pretty cheap and the ongoing stance of monetary policy on both sides of the Atlantic is attempting to be supportive,” Dinning said at his office in Edinburgh. “That has helped out some parts of the market better than others and particularly corporate credit has been outperforming equity. It may well be that equity can play a bit of catch up.”

Interest rates in the U.S., the euro region and the U.K. are at record lows as central banks try to revive economies that went into recession in 2008 as a result of the banking crisis and credit crunch. The U.S. and U.K. have used quantitative easing, whereby the Fed and Bank of England have been buying bonds to add liquidity to the financial system.

Aegon this month sold some Japanese stocks and bought Asian currencies including the Korean won and Taiwanese dollar. Dinning said he expected to get the same “bang for our buck” as from holding stocks in Japan. The Nikkei 225 Index has fallen 14 percent in yen terms this year.

The Aegon fund business increased assets by 1.5 percent in the first half, while Standard Life’s advanced 3 percent from the end of the year, according to filings.

“Equity valuations are not stunningly good and they are not stunningly bad,” said Milligan. “The market is skittish; we are in for some good buying and selling opportunities.”

To contact the reporters on this story: Rodney Jefferson at r.jefferson@bloomberg.net; Peter Woodifield at pwoodifield@bloomberg.net.

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