Government yields will continue to vex this year

The senior fixed income fund manager for Royal London Asset Management said in 2014 the “power of central banks to surprise markets and depress yields had been a vexing issue, and even the US Federal Reserve seems to have no confidence in the sustainability of growth”.

Mr Vaid said that despite balance sheets looking healthier, there was still too much household debt, and if interest rates did rise – RLAM anticipates a peak of 2 per cent – there would be a significant effect on households.

Overall, he said that people seeking strong fixed-income returns should not put their hopes in government bonds, which are subject to policy and macro decisions.

“At the moment the risk-reward ratio favours investment grade because companies have been managing their balance sheets well, reducing the number of defaults,” he said, adding: “But I believe the easy money has been had already in 2014, and 2015 will require fund managers to pick stocks more carefully, as idiosyncratic risk increases as evidence by recent events, such as Tesco and Phoned4u.”

The fund is diversified, with 251 holdings. Mr Vaid added: “We need to realise as managers that the corporate bond markets have never been liquid. That is one of the reasons that no matter how much we like a stock, we will always diversify.”

Adviser view

Andrew Swallow, chartered financial planner for London-based Swallow Financial Planning, said: “I am very negative about any form of fixed interest. We have had 25 years of amazing capital growth in fixed-interest funds. These have been linked with the drop in base rates from 15 per cent in 1990 to 0.5 per cent now.

“Sovereign debt is, as Mr Vaid has stated, vastly overpriced. It is obvious to any economist that the euro is hugely subsidising the debts of the poorer countries, and if they come out of the euro then they will default and interest rates will rocket.

“Therefore, my list would have gilts and index-linked gilts right at the bottom.”