FUND VIEW-Schroders prefers corporate bonds over government debt

* Switch to corporate bonds as economies recover

* Reduce government bond exposure on inflation outlook

* Banking, telecoms and technology sectors preferred

HONG KONG, Sept 14 - Investors should increase their exposure to corporate bonds and reduce government bond holdings as the economic rebound gains traction and inflation looms, the head of fixed income at Schroders Investment Management <SDR.L> said on Monday.

The funding burden of the public stimulus programmes which stoked the economic recovery would also mean that interest rates will have to move up, making government bonds unattractive, Karl Dasher told Reuters in an interview.

But corporate bond investments will have to be made on a selective basis as investors become increasingly picky after a "somewhat indiscriminate" rally lifted valuations significantly in the past few months, he said.

"We are guiding clients to invest in credits rather than government bonds," said Dasher whose fund oversees $40 billion in fixed income assets.

"But the story from here onwards will be about security selection and on a credit differentiation basis."

Dasher said due dilgence and inhouse research is becoming more important because third-party opinions like those from rating agencies could not be relied upon.

"You just can't look at net leverage all the time -- you have to see the volatility of EBITDA for example and certain companies have very low volatility to support their leverage," he said, while adding many B-rated companies compared favourably with even those rated BBB.

"There is a lag in the opinion of rating agencies and fundamentals and in this environment that lag has been exacerbated."

BANKS, TELCOMS, TECHNOLOGY

On a broader perspective, Schroders has changed its negative view on the banking sector to a positive one after government support programmes reduced the damage to balance sheets.

Dasher said the opinion was changed after "it became clear to us how the support mechanism would unfold, how steepness of the yield curve would empower their interest margins and what the mark-to-market losses are likely to be."

He said this helped Schroders, which has bonds from JPMorgan <JPM.N>, HSBC <HSBA.L> and Goldman Sachs <GS.N> as its top holdings in its global corporate bond fund, capture the upside in the sector this year after avoiding last year's downside.

His fund also favoured debt from the telecommunications and technology sectors as they emerged from the global financial crisis in a better shape relative to the last credit cycle.

But Dasher said government bonds were on his underweight list because of risks such as inflationary pressures, a bottoming out of the interest rate cycle and supply concerns given the burden of funding public expenditure.

"In the longer run we have concerns about inflation and locking in at lower yields is somewhat difficult," he said while adding there are also worries about the U.S. government's unfunded contingent liabilities like healthcare and social security.

Hedge funds, which were forced to deleverage their balance sheets last year following the collapse of Lehman Brothers, were unlikely to return with the same strength as investors were taking a more moderate, less leveraged approach.

"Investors had a barbell strategy where they had very low risk investments along with hedge fund investments. Now they are moving more towards the centre -- taking money out of government bonds and hedge funds and allocating to unlevered funds like us."

And this had helped the market absorb the record corporate bond issuance this year.