50
40
30
% 20
10
FIXED INCOME CORPORATE BONDS
UT Sterling
Strategic Bond
UT Sterling High Yield
0
-10
UT Sterling
Corporate Bond
Feb ’09 May Aug
Source: Financial Express Analytics
Nov
UT UK Gilt
Feb ’10
Fixed income fund performance – 3 years
%
Corporate bonds
Fixed income fund performance – 1 year
30
20
10
0
-10
-20
UT Sterling
Strategic Bond Bo
UT Sterling High Yield
-30
Feb ’07 Aug Feb ’08 Aug
Source: Financial Express Analytics
UT UK Gil Gilt
Feb ’09
Fixed income indices performance
UT Sterling
Corporate Bond
Aug
Feb ’10
3m 6m 1yr 3yr 5yr 10yr
Europe OE £ Corp Bond -0.07 7.35 37.15 -3.63 -0.09 5.20
IBOXX GBP Corp TR 2.96 11.09 22.59 2.54 3.08 –
ML Glbl High Yield TR $ 4.86 16.99 56.04 6.56 7.16 7.14
MSCI World $
Source: Morningstar
1.21 7.16 33.46 -9.30 -0.40 -1.77
Shifting sands
Everybody’s preferred asset class of 2009,
corporate bonds, continue to offer attractive yield
opportunities. But, with new issuances in decline and
growth opportunities more restricted, would it be
wise for investors to start being more selective?
BY GARY SHEPHERD
Cast your mind back just a
couple of years and it was
the equity stockpickers that
were the stars of our industry;
those fund managers
in the fixed income space
were seen as the academic
types that could bombard,
and even bore, you with
stats about spreads and
yield curves.
I am generalising, but
there has certainly been a
shift in the attitude towards
those in the corporate and
high yield bond space,
with the likes of Richard
Woolnough and Jim Leaviss
of M&G and Paul Causer
and Paul Read of Invesco
Perpetual thrust into the
limelight as dependable
deliverers of growth and
income in times of economic
uncertainty.
l Changing landscape
We in the financial press
take some responsibility,
but the stats cannot be
argued with. According
to the IMA, bond funds
were by far the biggest
sellers in 2009, achieving
sales of £9.87bn compared
to just £2.85bn in 2008.
Bonds now comprise 20%
of funds under management,
a figure that has
increased markedly from
8% ten years ago.
But with spreads having
tightened, and that socalled
‘once in a lifetime’
opportunity for corporates
having seemingly passed,
does the sector offer the
same appeal for investors,
at least as a growth play, or
should it now be viewed
as a route to income only?
Mark Smith, head
of research at Andrews
Gwynne, stresses that
investors need to buy corporate
bonds for the “right
reasons”, primarily as a
source of regular income.
He says: “The fact that
there was an opportunity
last year to buy bonds and
make a shed load on the
capital side is fine, but it
is about what people are
buying them for now, and
people should go back for
what they were originally
– a source of yield.”
Smith actually prefers
to use strategic vehicles
rather than traditional corporate
bond funds, and
picks out Woolnough’s
M&G Optimal Income; L&G
Dynamic Bond Trust, managed
by Richard Hodges;
and the John Pattullo-led
Henderson Strategic Bond
Fund.
“These funds can provide
us with less chance of
capital decline and more
consistent returns because
what I do not want to see
is the big capital falls that
we saw two or three years
ago,” adds Smith.
“Some of the flexible
funds are yielding 6% to
6.5%, which compares well
to the traditional more constrained
corporate bond
funds.”
l Alternative to gilts
However, Mike Allen, head
of research at RMB Asset
Management International,
makes the point that corporate
bond funds on average
are still offering an
extra 2% on government
bond yields, positioning
them as a good alternative
to gilts. He also believes
that high yield works well
as a standalone investment
as a source of greater
income.
“We have seen really
good capital returns from
the compression in yield
and, while we may not
see a continuation in good
capital returns here, we
think higher quality corporate
bonds are a nice
substitute for government
bonds,” he says.
According to Allen, the
additional yield an investor
can pick up from investment
grade bonds is currently
at around 180bps,
compared to a peak of
around 600bps reached
in the wake of the collapse
of Lehman Brothers
in 2008 when the markets
really were expecting
Armageddon.
62 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
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