Fixed IncomeNov 25 2013

Schroders’ duo shuns government and corporate bonds in move to US and Europe

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Schroders’ Gareth Isaac and Bob Jolly have moved into European high-yield and US local government bonds in their Strategic Bond and Absolute Return Bond funds.

The duo is avoiding government and corporate bonds in most areas due to concerns about valuations, in spite of major sell-offs this year.

Mr Isaac said corporate bond spreads – the difference in yield between government and corporate bonds – were unlikely to reduce as they were “at or close to a peak”.

“We’re favouring the front end of the European high-yield market,” the manager said, referring to shorter duration bonds with a maturity of between three and four years. “We think risk-adjusted returns will be good and, while interest rates remain low, default rates will remain far below what is priced in.”

European high-yield bonds have already performed strongly this year in a difficult period for fixed income. Since the start of the year, the Merrill Lynch European High Yield index has risen 8.8 per cent, while the Barclays Global Aggregate index of corporate bonds has lost 0.3 per cent.

Also within Europe, Mr Isaac said he remained positive on individual companies in peripheral countries such as Greece, Italy and Spain, in spite of having reduced the funds’ overall exposure in recent weeks.

The manager said: “Corporate names have been beaten up because of their country rather than fundamental business reasons. Industrial companies with revenue streams outside Europe have taken a bit of a battering.”

Meanwhile, the US municipal bond market – which covers bonds issued by US states and government agencies – also offers “significant value”, Mr Isaac said. “In the past six to nine months, spreads have widened significantly in the municipal market,” he said. “We have about 10 per cent in the market where there is some great value relative to UK and European markets.”

According to data from Standard & Poor’s, the broad US municipal bond market has fallen 3 per cent in 2013, but in the five years to November 20 it rose 31.2 per cent.

Mr Isaac runs both the Schroder Strategic Bond and Schroder Absolute Return Bond funds alongside head of global macro Mr Jolly. Since the Strategic Bond fund’s launch in March 2012, it has gained 13 per cent, compared with the IMA Sterling Strategic Bond sector’s average return of 11.9 per cent, according to FE Analytics. The Absolute Return Bond fund has gained 8.2 per cent since Mr Isaac and Mr Jolly took it over in November 2011.