Advisers have expressed concern that strategic bond fund managers are buying up complex and potentially illiquid asset types in search of income.
Traditional fixed income markets such as investment grade and government bonds rallied as the eurozone debt crisis and US fiscal cliff discussions sent investors flocking into ‘safe haven’ assets last year.
This created a situation where asset yields have remained at extremely low levels for months, leading strategic bond fund managers to target exotic areas such as oil rig financing and commercial real estate loans.
Insight Investment’s head of UK and global credit Peter Bentley has backed commercial real estate loans in his BNY Mellon Absolute Return Bond fund. Ariel Bezalel, who runs the £1.5bn Jupiter Strategic Bond fund, has used oil rig financing and loan recovery firms.
Advisers said trying to understand these investments was causing a due diligence nightmare, and said they were concerned about the illiquidity of some securities.
“The onus is on advisers to look at underlying holdings of funds in detail and be wary,” said Brian Dennehy, managing director of Dennehy Weller. “The lessons learnt by property funds about keeping adequate liquidity for redemptions need also to be learnt by bond funds.”
As the financial crisis erupted in 2008-09, several major property funds were forced to switch their pricing basis to effectively halt client withdrawals, owing to a lack of liquidity to honour redemption requests.
Andrew Merricks, head of investment at Skerritts Consultants, said: “If we can do due diligence on these things and get money out it is OK. But in 2008 liquidity was key and people are forgetting about it because of the pressure on finding yield – it could drive them into things they can’t get out of.
“I wouldn’t criticise bond managers for looking around if it tops the yield up, but it is the pressure to find the yield that could be dangerous.
“Also, if the positions are not very large they may not be visible to investors and not flagged up.”
Whitechurch Securities managing director Gavin Haynes said: “You are paying fund managers to find these opportunities but you need to understand them as well.”
Dennis Hall, managing director of Yellowtail Financial Planning, added: “Why not just buy equities? I don’t think end consumers understand the risks they are exposed to.”
Mr Bentley said Insight uses a “big team” to scrutinise such assets, including legal experts, and that they are a small part of a diversified portfolio.
Tangible assets
Ariel Bezalel, Jupiter Strategic Bond fund manager
Ariel Bezalel last week defended his holdings in specialist areas such as oil rig financing and loan recovery companies, saying: “Our starting point is not the upside but the potential downside. When we invest in illiquid assets they are collateralised by tangible assets so that in the event of a default, we have a claim on the physical assets.”
