Last month’s spike in bond market volatility has made some areas of the corporate bond market “more compelling”, according to Pimco’s Ketish Pothalingam.
The manager of the £1.2bn Pimco GIS UK Long Term Corporate Bond fund and the £589.4m Pimco GIS UK Corporate Bond fund saw his funds hit hard by the sell-off, which was triggered by US Federal Reserve chairman Ben Bernanke’s comments regarding a possible “tapering” of quantitative easing (QE).
Mr Bernanke said in May that the Fed would “gradually reduce the flow of purchases” in its QE programme if economic data and inflation levels improved.
In May the US added 175,000 jobs, which means unemployment rose a little less than expected.
Mr Pothalingam said: “The discussion about tapering of QE remains a discussion. It remains unlikely that the Fed is going to rush to exit. It is talking about a slowing down of QE, not a stop.
“The credit market got extremely frothy. By the end of April non-sterling spreads came very close to pre-Lehman Brothers levels. Sterling spreads haven’t got there yet, so they have still got some value and the correction makes it more compelling.
“Also new issuance is failing to impress, so there isn’t enough new issuance to satisfy demand. That is positive in spread terms.”
He also said there was no “single take-off point” for the global economy, meaning that yields were unlikely to be driven up suddenly by positive growth from areas such as the UK or Europe. “If there is a growth surprise to the upside then rates could rise,” he said.
“The cyclical outlook remains difficult, Europe remains mired in recession. We are very wary of rising rates but the current state of economic growth is challenged.”
However, the manager said long-dated credit and government bonds were “not necessarily the best place to put your money”.
He added that he had removed longer-dated bonds from his funds as the spreads – the difference between the prices of corporate and government bonds – “do not cushion you from what might happen in gilts”. Longer-dated bonds tend to be more sensitive to interest rate movements.
The UK Long Term Corporate Bond fund lost 3.1 per cent in May, while the UK Corporate Bond fund lost 2 per cent, according to FE Analytics, ranking both in the bottom 10 per cent of the IMA Sterling Corporate Bond sector.
However, Mr Pothalingam has led the UK Long Term Corporate Bond fund to a five-year gain of 69.5 per cent, the best return in the IMA Sterling Corporate Bond sector to June 11, according to FE Analytics. The Pimco GIS UK Corporate Bond fund is also in the top 10 best funds in the same period. Both posted top 10 returns in the three years to June 11.
