FUND SELECTOR GLOBAL FIXED INCOME analysis
Only fools rush in
Investors desperately hungry for a halfway
decent return have flocked in droves to
corporate bonds. But they may be moving
too fast too soon as some warn that not
all is as it seems in the sector
BY DANIEL JUDGE
Fixed interest, particularly
corporate bonds, have been
the focus of much attention
in the first few months of
2009. With virtually all
mainstream and alternative
asset classes palatable to
only the most adventurous
investors, and cash deposits
offering paltry returns, the
rewards investors can
receive for holding corporate
and high-yield bonds
have become increasingly
attractive.
Bond returns in the 18
months leading up to this
year had been dominated
by government debt – witness
Gartmore Global
Bond and Templeton
Global Bond leading the
three-year performers on
page 20. Investors had
sought shelter in the safety
offered by this asset class
as the credit crisis engulfed
markets and, consequently,
other fixed income sectors
suffered greatly as investors
rushed for the exits.
The outcome of such
panic in the credit markets
has been a huge widening
in the spreads available in
corporate bonds. And, as
quickly as some investors
left the sector, 2009 has
seen a stampede of them
return, hungry to grab a
slice of the corporate bond
cake from an otherwise
empty investment larder.
But there are two sides
to every story. With investors
piling into the sector
(in the UK in the first quarter
of this year, funds
investing in corporate
bonds were the top sellers)
there has been much
talk of a corporate bond
bubble. Even so, yields
have yet to suffer any
depression or, put another
way, prices have yet to rise,
and as a result corporate
bonds are highly attractive
compared with gilts or
bank deposit accounts.
What is of most concern
is defaults, and how widespread
they will be in an
environment of global
recession. At the extreme
end of the spectrum, some
forecasters are predicting
more than two out of three
investment grade issuances
could default. While this is
the opinion of a minority,
there is no doubt some
Glbl fixed inc sector avg – 3-yr perform’ce
%
18
15
12
9
6
3
0
Morningstar IM FI Global
-3
Mar ’06 Sep Mar ’07
Source: Morningstar
Sep
Mar ’08
Sep
Mar ’09
firms, particularly those
with high levels of debt,
may have trouble ahead.
James Mashiter, associate
director at S&P Fund
Services, says investors
should look to pick fund
managers who are focusing
on quality.
“The people in the best
position are those managers
that did not suffer high
redemptions last year,” he
says. “They have dry
powder and can take
advantage of the historically
wide spreads available.
“During the bull years
you could pretty much
pick any corporate bond
and watch it rise. But the
forced selling of the past
18 months has perversely
led to some of the higher
quality bonds being sold
off in order to meet
redemptions.
“Managers in general
hold the view that the
market is going to discriminate
carefully between
stronger and weaker credits
going forward, both in
the corporate and sovereign
space. Security selection
will be crucial.”
“ The people in the
best position are
those managers that
did not suffer high
redemptions last
year. They have dry
powder and can take
advantage of the
historically wide
spreads available
”
James Mashiter, associate
director, S&P Fund Services
MAY 2009 [www.international-adviser.com] INTERNATIONAL ADVISER
19
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