Introduction
So it is perhaps unsurprising that many retail investors are voting with their feet and moving away from fixed income into equities, property and other asset classes that offer the potential for more income.
Figures from the Investment Association show that in March 2015 the Sterling Corporate Bond sector saw net retail outflows of £59m, the largest in the fixed income sector, with even Global Emerging Market Bonds only losing £52m during the same month.
So what is putting investors off the corporate bond sector? Inflows into global bonds and UK gilts remained positive during the month surpassing the £100m mark, yet even with positive performance figures the corporate bond market has seen net retail outflows in five of the past 12 months.
Tom Becket, chief investment officer at Psigma Investment Management, argues there has been “a lot of hot air wasted in discussions about bond bubbles over the past few years, as yields have collapsed and prices have soared in the extraordinary world of zero interest rates and quantitative easing”.
But he adds: “On bubbles our view is simple: despite the fact that countries like Germany and companies like Nestlé have been able to borrow for free… it does not mean there is a bubble in bonds… We just think they are bad value. With bonds, unlike equities, property or commodities, you should always know what you are going to get in the form of a nominal return.”
Evaluating recent moves in bond markets Mr Becket suggests that in the medium term the upward pressure on yields will continue.
The lower yields on government bonds may be encouraging some investors to look at other parts of the fixed income spectrum such as corporate bonds, but amid uncertain macroeconomic conditions investors should make sure they understand what they’re switching into.
Anthony Doyle, director and head of fixed income investment specialists at M&G Investments, noted in a recent blog post that: “For those looking at moving out of government bonds given low yields… investors might view investment-grade corporates as a good alternative, and historically investment-grade assets have shown a relatively low probability of generating a negative return in a calendar year.”
But he cautions: “Investors should be aware that investment-grade corporate bonds have proven to be closely correlated to government bonds. Subsequently, any sell-off in government bond markets will likely hit investment-grade corporate bond returns as well. The collapse in corporate bond yields to extremely low levels has reduced the income contribution of total returns, though the credit spread on offer is rewarding in an environment of low defaults and solid economic growth.”
So while fixed income remains a useful asset class for investors in search of income and diversification, the macroeconomic environment and the impact this has on different parts of the credit spectrum means investors need to be careful about the exposure they take.
THE PICKS
Rathbone Ethical Bond
Managed by Bryn Jones, this £286m fund aims to provide a regular above-average income by investing in bonds and bond market instruments that meet “strict criteria ethically and financially”. A member of the Investment Adviser 100 Club 2014 and 2013, this vehicle has delivered consistent medium- and longer-term performance with the three-year return of 32.95 per cent ranking it second in the sector. Its one-year performance has slipped slightly pushing it into the third quartile with a return of 6.5 per cent, but overall this remains one to watch.
HSBC Corporate Bond
This £509.05m fund was launched in February 1996 and has been managed by Mohamed Siddeeq since May 2012. Its aim is to provide a “regular and competitive level of income” from a portfolio of predominantly sterling corporate bonds. Performance has been somewhat patchy over the long term with the fund ranked third quartile in the sector for the 10 years to May 21, although its one-year return of 7.44 per cent places it into the top quartile, outperforming the sector average of 6.32 per cent.
EDITOR’S PICK
Royal London Sterling Credit
Managed by Paola Binns this £455.4m fund was launched in November 2012 and aims to maximise the level of income over the long term of roughly seven years. A member of the Investment Adviser 100 Club 2014, it is ranked in the top 10 of the IA Sterling Corporate Bond sector across three and five years with a five-year return of 47.78 per cent compared with a sector average of 33.35 per cent.
