In a world where investors need income but cannot trust bonds, JPMorgan Asset Management (JPMAM) multi-asset managers are participating in the new phenomenon of “bondification”.
In the latest annual report produced by Create-Research, Principal Global Investors surveyed 705 managers worldwide and found they were looking to invest in equities that were more bond-like, as well as other alternative bond-like vehicles.
JPMAM’s multi-asset income managers Talib Sheikh and Michael Schoenhaut are among those taking part in this trade, dubbed “bondification”.
The pair have been investing their £415.4m JPM Multi-Asset Income fund in shares with good dividends, fewer debts, strong pricing power, free cashflow and high return on equity.
Anne Lester, JPMAM managing director and original manager of the fund, explained: “It’s more important now to pivot asset classes into equities as yields get squeezed down in the bond market.”
Global equities make up 26.4 per cent of the portfolio, its June factsheet shows.
European equities were the team’s highest conviction holding as the stocks had “attractive yields, decent valuations and an accommodative European Central Bank”, Ms Lester said.
The managers have not held investment-grade bonds in the fund since 2010, but have held large portions in high-yield bonds. However, the pair have been dumping some of these bonds in favour of their equity portfolio.
In 2009, the group’s high-yield allocation made up roughly 40-45 per cent of the fund, but now it is just 23.6 per cent.
Yields on high-yield bonds have been plummeting in recent years, dropping from a yield of roughly 11-12 per cent to about 6.5 per cent.
But high-yield bonds appear less risky than they used to be, with default rates expected to be around 2-3 per cent for the rest of the year, compared with the long-term average of approximately 4 per cent.
“It’s not that we think high yield is terrible, because it’s not,” Ms Lester explained.
“But relatively speaking we think equity is more attractive.”
The allocation to global equities has recently hurt the performance of the fund, which has been in the bottom quartile for the past year.
It delivered 1.4 per cent in the period, compared with the IA Mixed Investment 20-60% Shares sector’s average return of 3.9 per cent, the fund’s factsheet shows.
Meanwhile, in order to diversify further and take advantage of the fact the US is the fastest-growing economy, the team has been buying US non-agency mortgages and preference shares because they have “impressive yields”.
The US non-agency mortgages, which made up 8.1 per cent of the portfolio at the end of June, are mostly residential mortgage securities that are not insured by government agencies.
