Fixed Income  

Floating rate liquidity benefits prove popular

Floating rate liquidity benefits prove popular

A growing desire to participate in the floating-rate debt market is partly being driven by managers’ increased concerns over bond market liquidity, according to M&G’s James Tomlins.

Floating-rate bonds are typically valued by investors for their lower interest rate sensitivity, but Mr Tomlins said the recent uptick in interest is also due to bonds being more liquid than leveraged loans.

“There is demand for floating-rate notes – funds like them because there are liquidity benefits,” he said.

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Mr Tomlins, who has managed the $757m (£500m) M&G Global Floating Rate High Yield Oeic since launch last September, said corporates are also beginning to favour the space.

“We have seen fairly consistent issuance in this space. Companies, rather than going to the bank for a floating rate, have changed to the bond market.”

The size of the floating-rate market plunged sharply in the aftermath of the financial crisis, as companies and investors adjusted to interest rates moving to historic lows.

But with tightening cycles drawing nearer in both the US and the UK, Mr Tomlins said he was expecting the recent resurgence to continue.

“The biggest thing I am anticipating is a development of the market itself,” the manager said. “We were conscious [when the fund launched] that this was quite a niche market. It’s about $42.5bn – it’s quite a small paddling pool.

“The big change is seeing this market grow and develop and broaden and become a bit deeper.”

He added: “We have got the bond market in general crying out for floating-rate exposure for the next two to three years, as the interest rate cycle has driven investors’ demand.”

The manager continues to position his portfolio relatively defensively, shunning more cyclical sectors in favour of the likes of senior secured debt.

However, Mr Tomlins is examining opportunities in the energy sector, but said any opportunities would be companies that had a strong enough asset base to withstand default risks.

He added: “We are not doing a hero trade [in this sector].”

Mr Tomlins’ cautious stance has helped his fund outperform significantly in its first year during a tricky time for the wider high-yield market.

Over the year to September 30, the portfolio has returned 7.1 per cent, compared to a 1.6 per cent loss for the Investment Association Sterling High Yield sector, according to data from FE Analytics.