Invesco Perpetual’s Paul Read, one of the most respected bond fund managers in the UK, has issued a strikingly negative outlook on the asset class.
The manager has warned investors to keep their expectations low for bonds, in a dour client webcast this morning. He said it was “hard mathematically” to argue that bonds, particularly high yield, will deliver positive returns.
The warning comes after bonds have enjoyed years of strong performance amid the financial crisis that first began in 2008, as central banks have kept interest rates at all-time lows to kick start the global economy.
Many experts have warned of a ‘great rotation’ out of bonds in recent months, amid increasing signs that central bank thinking is shifting towards selecting the right moment to raise rates back up.
Mr Read said: “Investors probably still need to manage expectations about my asset class,” he said.
The manager accepted yields, which move inversely to prices, were moving higher - which is bad for returns from bonds - but claimed this was a “long process” and the market would be “trading in ranges for a long period of time”.
Mr Read is not the only bond manager to issue bearish outlooks for the prospects of fixed income in recent weeks.
Aviva’s High Yield Bond and Strategic Bond manager Chris Higham told Investment Adviser last week that the best years for strong returns from the asset class “are behind us” as his funds reached their five-year track records.
Fidelity’s Ian Spreadbury also said investors were moving away from his £3.3bn MoneyBuilder Income fund, which is more exposed to investment grade bonds, towards his Strategic Bond fund, which can invest across the fixed income spectrum.
However, Mr Read also said there were reasons to be positive on bonds.
“We have had a pretty reasonable sell-off in important government bond markets. Treasuries, gilts and bunds have had a decent sell-off and we are likely to be in a relatively low interest rate environment for a long time.”
He said there would still be opportunities to make money in fixed income and that it would continue to provide a “relatively safe income” for investors who need it.
He acknowledged areas of fixed income, such as high yield, had seen incredibly strong returns in recent years and the prospects for capital gains from high yield bonds had become more limited.
“The high yield market has had a fantastic run and from the lows in late 2008 to March 2009 there has been a lot of money to be made in high yield,” he said.
“Huge amounts of the high yield market trades at par or trades to call. It is very hard mathematically to argue there is much capital upside left in high yield.”
The manager said although yields on selected high yield bonds remained attractive relative to those on government securities, he warned investors to “not reach too much for yield”.
Elsewhere, Mr Read addressed a question about liquidity of his funds, which include the giant £5.5bn Corporate Bond fund.
The manager said the team always thought about liquidity adding: “I don’t think managing funds the size we do is an impediment and if we did we would have to shut the funds down.”
