Fixed Income  

Investors ‘in denial’ over bond risk

Bond managers from major fund houses have warned of significant losses from their own asset class and claimed investors are “in denial” about the risks.

Bond managers from major fund houses have warned of significant losses from their asset class and claimed investors are “in denial” about the risks.

Key fixed income managers from Henderson Global Investors, Legal & General and Old Mutual Global Investors have moved to defend their funds from adverse market conditions as they highlight major hurdles for the asset class.

The spotlight has been on fixed income during 2013, with market commentators predicting a ‘great rotation’ out of fixed income and into equities.

Pressure has been building on government bonds in particular because of fears of interest rate rises, which would push yields up and prices down – effectively meaning that investors suffer losses.

This year, government bond yields have also risen sharply because of speculation about withdrawal of quantitative easing in the US.

The yield on 10-year UK government bonds has risen from 1.88 per cent at the start of the year to 2.72 per cent last week, which has meant heavy losses for government bond holders.

In addition, corporate bond investors have taken a hit, as higher quality bonds in the investment grade sphere are priced relative to gilts.

Jenna Barnard, co-manager on the £1.1bn Henderson Strategic Bond fund, said she had been adding to financials and higher yielding bonds because returns were unlikely to come from bond price rises.

“In general, we do not see the potential for capital appreciation but we have been telling investors we are looking for a high income return,” Ms Barnard said.

“The key for us is finding sensible income and not stretching for yield. If you start buying marginal bonds that is when you suffer later on with defaults.”

At the end of September, high yield corporate bonds made up 52.2 per cent of the portfolio, which is up from roughly 42 per cent at the start of the year.

“We thought income would be the primary driver of return,” Ms Barnard said.

“There’s not much default rate risk [in high yield] and it is less sensitive to what is going on in the gilt market, one area we are quite shy of.”

Old Mutual Global Investors’ head of fixed income Christine Johnson has also invested more in lower rated bonds to reduce her Corporate Bond fund’s sensitivity to movements in government bond prices.

Ms Johnson said: “Investors are usually very intolerant about losing money. There is a level of denial about the losses that could happen in bond markets.

“It has been a long time since bond managers had to deal with a significant rise in government bond yields. It’s been at least five years since we’ve seriously had to think about where the growth is going to come from.

“We have been talking about rising government bond yields for three years and for a long time it was difficult to get an audience. This year has reinforced our position.