Schroders in big move to emerging debt

By Claire Milhench

LONDON (Reuters) - Schroders has hiked exposure to emerging market and high-yield debt in its Strategic Bond Fund, fearing higher inflation and interest rates will put particular pressure on mainstream western debt.

Nick Gartside, head of global fixed income at the fund firm, said allocation to the sectors is now at more than 45 percent from a low of just 3.5 percent in February.

Gartside said the boost has come as he anticipates two "bolts of lightning" on the horizon for bond investors -- higher inflation and higher interest rates.

"Inflation will surprise on the upside very quickly, particularly in the UK and U.S. In this environment, emerging market debt, inflation-linked bonds and high yield should make money," he said.

"I wouldn't touch (western) government bonds with a bargepole," he said.

Emerging market debt offers better value than high yield at the moment, he added. The switch has come at the expense of U.S. agency mortgage-backed securities, where allocation has been cut to about 20 percent at end-October from 75 percent in February.

The fund, which has some $900 million in assets, is invested in sovereigns like Indonesian and Egyptian local currency bonds, but has also been adding corporates.

Gartside said that as emerging markets are industrialising at a rapid rate, strategic infrastructure assets are often implicitly or explicitly government guaranteed, but will offer a yield as much as 2 percent higher than the sovereign bond.