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Scottish Widows Places $900 Million Bet on U.S. High-Yield

Scottish Widows Investment Partnership, Edinburgh’s second-biggest fund manager, is putting $900 million into U.S. high-yield bonds, which almost doubled investors’ money during the past two years.

Scottish Widows will move Neil Murray, head of credit, to New York next month as part of a plan to manage money in the U.S. in June, Mark Connolly, director of fixed income, said in an interview at the company’s headquarters.

U.S. non-investment grade, or junk, bonds returned 3.7 percent this year, adding to annual gains of 15 percent and 58 percent in the previous two years, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. The measure is up 90 percent since March 4, 2009. Investors have added cash to junk bond funds for the 12th straight week, the longest streak since October 2009, EPFR Global data show.

“As our clients ask us to diversify portfolios, we want to be able to manage assets derived from the largest capital market in the world,” said Connolly, who is in charge of teams managing about 68 billion pounds ($110 billion) of assets. The high-yield market is first because “we can see a very strong economic and client driver for it,” he said.

Corporate bond sales in the U.S. are rebounding from the lowest level this year as economic reports ease concern that rising oil prices will derail the recovery. The U.S. unemployment rate unexpectedly fell to 8.9 percent in February, the lowest level in almost two years, and employers boosted payrolls amid growing confidence.

Bond Sales

Sales of speculative-grade bonds soared to $12.7 billion in the five days through March 4 from $1.07 billion the week before, data compiled by Bloomberg show.

The move is designed to grow the business and “also to protect what we have,” Connolly said on March 2. “If we don’t do this, our clients in time will use other managers. It’s as much a defensive as it is an offensive strategy.”

Returns are beating sovereign debt. U.S. government bonds have lost 0.4 percent since Dec. 31, according to Merrill Lynch Indexes. Treasuries returned 5.9 percent last year after losing 3.7 percent in 2009, Merrill’s Treasury Master Index shows. The yield on the 10-year Treasury note, the market bellwether, was at 3.52 percent today, after climbing to as high as 3.77 percent on Feb. 9, the most since April 2010.

Scottish Widows plans to start investing money for clients in investment-grade debt in the U.S. in early 2012, Connolly said. In all, the firm first recruited three people for high-yield debt in the U.S. Management of European high-yield bonds will remain in Edinburgh, he said.

The 2.65 billion-pound Scottish Widows Corporate Bond Fund, the company’s biggest mutual fund, rose 4.9 percent in the 12 months to March 4, ranking 60th of 87 similar funds and compared with an average increase of 5.6 percent, according to data from Chicago-based Morningstar Inc. The fund, overseen by Murray, placed 47th of 78 peers over the past three years, gaining 13.8 percent compared with the average of 14.7 percent.

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