The manager said the move was also aimed at maintaining the fund’s position as one of the highest income payers in the IMA Sterling Corporate Bond sector.
Mr Vaid has roughly 22 per cent invested in structured bonds and further smaller allocations to securities that are connected to real estate, social housing and infrastructure.
“We have these holdings in asset-backed securities as that is where the inefficiencies lie in the market,” the manager said.
“They are non-cyclical and provide quite a lot of balance within the portfolio as they exhibit defensive qualities.”
Among the investments he highlighted was a bond issued by Lloyds Banking Group and backed by a pool of residential property – although he emphasised this was a very different type of product to those that turned sour during the credit crunch. He added that investing in these asset classes – which still fall within the remit of the IMA Sterling Corporate Bond sector – has allowed the fund to maintain a distribution yield of more than 4 per cent without investing in pure high yield bonds, which have lower credit ratings and carry a higher risk of default.
“We see opportunities in asset-backed securities, structured bonds and also corporate hybrids,” Mr Vaid said.
“We’ve not really bought high yield – it’s only roughly 6 per cent of portfolio. We’ve got that income by exploiting inefficiencies, for example through ratings and asset-backed securities.
“We are trying to unearth opportunities where other investors are not looking.”
He gave the example of a small position in a bond issued by Greater Gabbard, a company that operates an offshore wind farm and is responsible for connecting it to the mainland power grid.
Mr Vaid said that it was an example of an infrastructure investment which offered an “attractive” yield above that of government bonds.
The Royal London Corporate Bond fund ranked in the top quartile for performance in the IMA Sterling Corporate Bond fund in one, three and five years according to FE Analytics.
In five years the fund is up 73.7 per cent compared with the sector’s average 58.5 per cent gain.
Mr Vaid also runs the £158.4m Royal London European Corporate Bond fund, which is one of the 10 best-performing funds in the IMA Global Bonds sector since its launch in August 2012, gaining 18.1 per cent compared with the sector’s average 1.3 per cent gain.
More managers warn on early rate rise
There is a “risk” of the Bank of England raising the base interest rate earlier than expected, according to Royal London Asset Management’s corporate bond manager Sajiv Vaid (pictured).
“One has to take into account the success of forward guidance: rates rising quicker than the market expects is a risk,” he said, adding that he was employing a shorter duration position than his benchmark in order to lower his portfolio’s sensitivity to interest rate movements.
Mr Vaid’s words echo those of other bond and multi-asset managers, including Old Mutual Global Investors’ head of fixed income Christine Johnson.
Ms Johnson said investors needed to “start to think about how to protect themselves from rising rates”.
She said: “I think there is a good chance there will be a rate rise this year. [Bank of England governor] Mark Carney is signalling that we have to think about what a rate rise might mean. It’s happening sooner rather than later.”
M&G’s multi-asset managers Steven Andrew and Eric Lonergan have positioned their funds to benefit from their forecast that interest rates in the UK will rise sooner than expected but will settle at a level lower than expected.
The base interest rate has been 0.5 per cent for five years since the height of the financial crisis in a bid to force investors out of cash and stimulate asset growth.
The Bank of England initially indicated that it would reassess the case for ultra-low rates when the unemployment rate reached 7 per cent, but it has since removed this as an indicator.
