Introduction
Fixed income in general has taken a battering in recent months as investors rotated into equities.
But among the worst affected fixed income sectors has been the IMA Sterling Corporate Bond universe, which has featured as the worst selling sector in the IMA universe for net retail sales in seven of the 12 months to March 2014.
Moreover, while it was not the worst selling sector in five of those months, figures from the IMA show the sector has seen net retail outflows for 11 of the past 12 months, finally seeing a positive inflow of just £94m in March this year.
This compares unfavourably to most other fixed income sectors in the IMA universe, with the Sterling Strategic Bond sector and the Sterling High Yield universe both seeing mainly positive inflows, even if they were relatively small.
These figures point to a change in sentiment among investors, as during the equity rally and the recovery in developed market economies, investors who still wanted the comfort of fixed income were instead moving to the more flexible and riskier end of the market, no doubt in search of more yield and income.
However, with the UK apparently steaming ahead with predicted growth of roughly 2.9 per cent in 2014, it seems sterling corporate bonds may be starting to come back into favour. In contrast, emerging markets have experienced sharp, sudden sell-offs and recoveries in the US and Japan appear to be slowing.
Azim Meghji, head of UK fixed income at Santander Asset Management, notes: “Economic data in the UK continues to point to a robust recovery and the data continues to put pressure on UK gilt yields. Peripheral governments, corporates and financials continue to perform as money comes back to the region and economic data, on the whole, continues to improve.
“Our view remains that developed markets are experiencing a slow but steady recovery and, in spite of the potential headwinds, over the medium term the path of least resistance is for higher yields.
“UK credit spreads are tightening to levels last seen five years ago, but, while credit markets are no longer cheap, selective stockpicking opportunities remain strong.”
Of course, this may be a temporary blip on the radar as investors pause for breath and wait for the equity market to kick back in, but with a number of global geopolitical risks in the air – Japan and US growth stalling, the risk of low inflation or deflation in Europe, the Ukraine and Russia crisis ongoing – there is the possibility this could be the first step in a flight to safety away from the riskier ends of the market and towards the ‘safe haven’ of gilts and Treasuries.
It will be interesting to see what events drive the market in the next few months, and whether corporate bonds make a resurgence among investors.
THE PICKS
Old Mutual Corporate Bond
This £475.8m fund is managed by Christine Johnson and has a diverse portfolio of roughly 132 holdings. The fund typically holds at least 80 per cent of its portfolio in sterling-denominated bonds or those hedged back to sterling, with a rating of BBB- or above. The remaining 20 per cent can be invested in lower rated bonds, although just 10.5 per cent of the portfolio was in high yield and 2.9 per cent in unrated bonds at March 31 2014. It is the best performing fund in the IMA Corporate Bond sector for the five years to May 21 2014 with a return of 97.86 per cent against a sector average of 54.5 per cent.
Royal London Corporate Bond
Managed by Sajiv Vaid, this £514.02m fund entered the Investment Adviser 100 Club for the first time in 2013, helped by its consistent performance that has placed it top quartile in the sector across one-, three- and five-year periods. Its five-year return of 71.78 per cent places it tenth in the sector compared with the 54.5 per cent average, while the one-year return of 2.71 per cent also puts it in the top 10 of the sector. Its highest sector weighting is in structured, at 21.3 per cent, followed by a 20.6 per cent allocation to banks and financial services.
EDITOR’S PICK
Rathbone Ethical Bond
A member of the Investment Adviser 100 Club in 2013, this £179.37m offering is managed by Bryn Jones and is currently top quartile in the sector across one, three and five years. Its largest sector weighting is to banks at 35.05 per cent of the portfolio, while its highest credit weighting is to BBB- at 25.11 per cent. The five-year return of the fund, at 83.88 per cent, places it in the top 10 of the sector, while the one-year return of 4.78 per cent is more than three times the sector average of 1.31 per cent and ranks the fund second in the sector.
