Fixed Income  

Investors ‘nervous’ about low yields

Fidelity’s Ian Spreadbury has said investors are moving away from his £3.3bn MoneyBuilder Income fund and into his Strategic Bond fund as they become “nervous” about the low yields on corporate bonds.

Mr Spreadbury argued there was “a bit of value” in investment-grade bonds because the average yield at 4 per cent remained above the level of GDP growth of 3 per cent even though the two normally run in tangent.

The manager added he thought the yield levels were justified by the economic environment but that he could understand investors’ nervousness.

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“We are seeing a lot more interest for the strategic fund because people are nervous about interest rate risk in a pure investment grade bond fund,” the manager said.

“Yields have come down a long way. Yields on investment grade bonds are 4 per cent, which is historically quite low.”

Mr Spreadbury said, if investors began to worry about interest rates rising, it could prompt investors to sell bond holdings and force yields – which move inversely to prices – higher.

“The concern is, if people feel we will get a rise in yields, it could start a bit of a trend,” Mr Spreadbury said.

“The technicals could get negative quite quickly. A lot of people have substantial weighting in bonds and it could cause market volatility.”

Data from FE Analytics showed the MoneyBuilder Income fund had fallen in size in the past few months from £3.4bn to £3.2bn while the Strategic Bond fund has steadily gained assets in 2013 after rising from £1.3bn at the start of the year to £1.4bn at the end of July.

Elsewhere, Mr Spreadbury said he had used a recent change in the fund’s mandate to buy a “substantial” amount of the huge bond issued by Verizon to fund its purchase of a 45 per cent stake in its US mobile operator Verizon Wireless. The stake is owned by UK group Vodafone.

The manager said he took part in this “exceptionally cheap” opportunity because the mandate change enacted last month meant the fund could now invest in investment-grade corporate bonds denominated in currencies other than sterling.

“I think that demand will continue and that the spread is attractive and could come down,” Mr Spreadbury said of the issue.

The manager said he had sought to increase risk in the MoneyBuilder Income fund by upping exposure to triple B bonds but had opted for bonds issued by more defensive companies such as Tesco and Imperial Tobacco rather than financials and cyclicals.

The Fidelity MoneyBuilder Income fund has delivered a second quartile return of 44.3 per cent in five years compared with the IMA Sterling Strategic Bond sector average of 42.2 per cent, according to FE Analytics.

The fund’s distribution yield is 3.7 per cent, according to the fund’s latest factsheet.