Fixed IncomeSep 2 2013

‘If you have to buy bonds, buy me.’

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Ignis Asset Management’s head of credit Chris Bowie has carved himself out a reputation as something of a perennial bond bear, at least in the past year. But he admits he is seeing some light at the end of the tunnel, even if it is just a glimmer for now.

“I am not as bearish as I was but I am still cautious,” he admits. But does he think it is time to buy yet? “No”.

The manager of the £263m Ignis Corporate Bond and £67m Absolute Return Credit fund sold all his own personal corporate bond holdings more than a year ago and “bet the ranch” on the latter vehicle. He eventually cashed out when he relocated to London and bought a family home.

Of course, Mr Bowie, who is responsible for more than £14bn in assets and oversees a team of four portfolio managers and nine analysts, acknowledges that income-seeking investors inevitably need a substantial amount of bonds, but he urges them to avoid aggressive funds.

He explains: “I am 42 years of age. I have at least another 20 years’ work ahead of me, so given my investment horizon I would rather be invested in a real asset like property than in bonds right now.”

Mr Bowie is far from being alone when it comes to distancing himself from the bonds. According to the latest IMA numbers, in June a flurry of retail investors turned their back on the asset class, as fixed income portfolios endured their highest rate of redemptions ever, at £624m.

“When I am meeting discretionary fund managers, many have portfolios that require a fixed allocation to bonds. What I am saying to them is if you have to buy bonds, buy me. I will beat the peer group and the benchmark because I am aware of the risks. I will give you a decent income – not the best income, but one with lower capital risks than the average.”

His plan appears to be working. The Ignis Corporate Bond fund, which presently yields some 3.41 per cent, is up by 38 per cent in five years, 23 per cent in three, and 7 per cent in one – ahead of the sector average on each occasion.

For its part, the Ignis Absolute Return Credit fund marked its first anniversary at the end of July. The fund exclusively uses derivatives and a pair-trading strategy, going, say, long Aviva but short on Axa. “We think we can beat cash as long as volatility remains high,” he says. In its first year of trading it managed a

1 per cent return versus 0.42 per cent against its benchmark (SONIA overnight cash rate).

It is refreshing to hear a fund manager speak in such a bluntly candid manner about their specialist asset class, and no doubt investors’ ears will pick up when he eventually says “buy”. But for that to pass his lips, he first needs to see “sustainable growth and positive real yields”.

“It is not all bearish, it is just that volatility will be very high. Unless you are the sort of investors who can trade in and out of the asset class very quickly, I would suggest your longer term asset allocation should still be away from fixed income towards other asset classes until real yields become far more attractive.”

Mr Bowie says his ultimate benchmark of value is 10-year real yields. He says: “10-year gilt yields are getting towards 2.4 per cent, but inflation as measured by RPI is at 3 per cent. Before the crash and before quantitative easing started in this country, the long-term average for 10-year real yields was some 3 per cent.

“If the market does not go back to the long-term average but moves to some kind of positive real yield, that would still imply quite a move higher in gilt yields before I would feel comfortable with valuations, and that is looking at 1-2 if not 300 basis points higher, in government bond yields. Such an adjustment will be very painful for investors.”

But he urges that he has been at pains to say that the timing on this is very difficult to call.

“It could happen over 10 years, it could happen over one. Ultimately, though, moving from negative 0.6 per cent real yield to say plus 2 per cent is still going to be a significant capital loss of, say, about 20 per cent. So at some point bond investors will suffer that loss, I just cannot say when. But if you think bonds are low risk, think again.

“I am trying to invest in sensible names at sensible yields while keeping a close watch on capital risks. The downside is the yield drops, because I am not in some of the riskier names.”

Currently, Mr Bowie is finding opportunities in Thames Water and Scottish & Southern Energy. His leaning towards utilities is unsurprisingly down to the stable nature of the business models. He says: “Utility firms provide stable and repeatable cash flows, and these firms need to issue debt.”

To a lesser extent he is also finding investment potential in the telecoms arena, noting that mobile phone revenues, even in embattled Italy and Spain, have held up quite well. But his favoured play is secured bonds.

“I can buy Tesco Property, for example, which will yield 4.5 to 5 per cent, and with that comes the strength of Tesco plc. But even it gets into trouble – I still own the supermarket, and these are properties which could be sold on.”

Mr Bowie is at his most underweight financials since he joined Ignis nine years ago from Aegon. He currently holds a mere 20 per cent weighting, half the benchmark allocation.

He still believes there are lots of reasons to be concerned, especially with regard to banks in Europe, which he says have weaker balance sheets than many investors might believe.

To date he says there has been no action from the European Central Bank, which he believes can drive the beleaguered region towards sustainable growth.

“Unemployment is the real risk. It is going to lead to further social tension and eventually, possibly a breakup of the eurozone,” the manager predicts.

However, while he has eschewed the banks of Spain and Italy, he has kept his bets closer to home and has exposure to Barclays and HSBC.

“The US appears to have reached the point of a self-sustaining recovery. Employment is better and confidence is higher. But the jobs situation still needs to improve. In the UK we are getting closer to sustainable growth, but there is still a huge debt overhang. If the housing market, business investment and employment all pick up, I would be more confident of a sustainable recovery.”

None of the above has made his job any easier, and he admits it is more difficult than ever. “It is stressful because it is difficult to have any high conviction – we can do all our research, but at the end of the day we are trying to second-guess politicians, who can change their tune at any moment.”

After graduating from Strathclyde University with a BA (Hons) in Economics, the self-confessed “computer geek”, spent the first two years of his career as a programmer with National Australia Bank.

The married father-of-two admits he still enjoys writing computer programmes at Ignis, and doing such work helps with the daily grind, while at the weekend he tends to pound the Kent countryside with local group, the Midlife Cycling Club. “You have to be over 40 to join,” he explains.

A film fan who lists The Godfather II and The Usual Suspects, among his favourites is also a big fan of Star Wars, rating the Empire Strikes Back as one of his top flicks.

In spite of the bad taste the trilogy left him with, the announcement of a new set of films has left Mr Bowie tentatively hopeful, as he is for a bond recovery – “provided there is no Jar Jar Binks”.