Fixed Income  

UK bond giants prepare for 2014 liquidity crunch

Two giants of the UK’s bond fund industry are preparing for a potential liquidity crunch in 2014 by stockpiling assets that can be sold quick in a crisis.

Fidelity’s Ian Spreadbury and Invesco Perpetual’s Paul Read said they were stocking up on highly liquid assets, such as cash and short-dated bonds, and unwinding positions in other bonds that can prove tough to sell in the event of a market rout.

A number of bond fund managers have in recent months rejected fears that bond market liquidity could evaporate, leaving them unable to sell off declining assets in a ‘liquidity crunch’ scenario.

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But Fidelity’s Mr Spreadbury, manager of the group’s £3.3bn MoneyBuilder Income fund, told Investment Adviser last week he had an “amber warning light going off”.

“If sentiment changes or something happens and we were to see outflows then I think it is an issue,” he said.

Mr Spreadbury said he was in a better position than most investors if bond sentiment turned negative because he was less focused on ‘systemic risk’ sectors such as financials, which he said would be hit harder in a bear market.

The manager said he was keeping roughly 5-10 per cent of the fund in a mix of cash, government bonds and supranational issuance to “make sure we can deal with outflows without being forced sellers”. Invesco’s Mr Read, co-manager on numerous major funds including the group’s £5.5bn Corporate Bond fund, said the team was holding “significant liquidity across all of our strategies”.

“This lowers our credit and duration risk but it also gives us assets that can be liquidated very easily. Being able to supply liquidity to a stressed market means you can potentially drive very hard bargains.

“So if value opportunities arise, if there is a sudden sell-off and we see attractive yields, we can move quickly. I’m sure that opportunities will arise and I want to be in a position to take them.”

At the end of last year Jupiter added extra derivative powers to Ariel Bezalel’s Strategic Bond fund to aid liquidity management, with the manager also dropping mandates on multi-asset products to focus on running the bond fund.

Fidelity’s Mr Spreadbury admitted that trading in and out of bonds in any major way can be “an issue” for large funds.

“It means that we have got to take a slightly longer term view on the holdings and make sure you have got conviction on what you buy because you might not be able to get out,” he added.

The MoneyBuilder Income fund lost 0.6 per cent in 2013, according to data from FE Analytics. Mr Spreadbury acknowledged it was “not a great year for high quality bonds” with 10-year UK government bonds being particularly hard hit after losing roughly 4 per cent in 2013.