Bond managers are piling into government debt after their performance suffered from failing to spot the opportunities in the top-performing asset class.
Many strategic bond managers were significantly underweight government bonds in 2014 and had to watch as debt from the UK, the US and across Europe outpaced corporate issuance.
In spite of the significant price rallies seen last year, managers are now buying up government debt on the view yields could fall further – meaning prices will rise – as investors seek safe havens in light of fears about weakening global growth.
James Foster, manager of the £796.2m Artemis Strategic Bond fund, acknowledged he had been late to the game in not owning government bonds last year.
“We experienced our fair share of pain in that regard,” he said. “We watched government bond yields go up and cried. It was one of the best-performing sectors last year and we weren’t a part of it.”
Mr Foster’s fund returned 4.1 per cent in 2014, which was less than half of its benchmark index’s return of 9.8 per cent. This was largely down to having no exposure to government debt.
But now the manager has cranked up his exposure to German bunds from nothing to 8 per cent of his portfolio, in spite of some of the issuance yielding its lowest ever levels.
“I don’t particularly like government bonds, but it seemed as though not owning them was a mistake,” he said.
Gary Kirk, manager of the £641.2m TwentyFour Dynamic Bond fund, has also beefed up exposure to government debt.
Mr Kirk has bought Portuguese and Spanish government bonds, mainly in the 10- and 15-year space. Peripheral European government bonds made up between zero and 2 per cent of his portfolio in mid-2014, but now account for 13 per cent.
Ariel Bezalel, manager of the £2.5bn Jupiter Strategic Bond fund, said his “barbell” strategy had become even more important and that he was “much more selective” when buying high-yield corporate debt.
Mr Bezalel had 25.5 per cent in government bonds in his portfolio at the end of November, with six of his top-10 holdings being Australian government bonds.
The trend of yields falling in government debt and rising in high yield shows little sign of abating.
Last week the Swiss government announced it was scrapping its policy of capping the Swiss franc at 1.20 to the euro. After the announcement, investors proceeded to pile into government bonds, leading to German 10-year and Swiss 10-year bonds closing at record low levels.
This could mean government debt continues to deliver outsized returns after its strong 2014.
Indices tracking US and UK government debt returned more than double in 2014 than index-tracking global high yield, according to data from FE Analytics.
Conversely, high yield has been impacted by the severe drop in the price of oil. Roughly 15 per cent of the US high-yield market is oil related, which has led investors to dump their holdings.