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Brady bunch

WH Ireland chief investment officer Ian Brady came into 2022 with his "lowest-ever" allocation to bonds, but has been "adding materially" to his holding in recent weeks, he recently told Asset Allocator. 

He has been drawn back into the asset class by the higher yields on offer, even in short-dated government bonds. 

Brady says: "Even short-dated US government bonds are yielding 4 per cent. This is basically the risk-free return in the market. A year ago those bonds were yielding less than 1 per cent."

The short-dated element is key for him, as in the government bond space "this is a risk-free trade", while in the corporate bond space shorter duration assets may come with less credit risk. 

This caution about the outlook for the wider economy is also impacting his view of the high-yield bond market. He says he has been adding "selectively" there, but is trying to focus on the lower-risk end of that asset class. 

He says if one's appetite for risk is large enough, "you can get a yield of 12 per cent on some high-yield bonds. But those are perhaps higher risk, and the areas where you can take less credit risk you can get a yield of 8 or 9 per cent."

Brady believes inflation will tumble over the coming year to around 4 per cent. 

In his view an economic downturn is coming, and this should also boost the investment case for bonds. 

Two of the bond funds he has bought are Royal London Short Duration High Yield and Schroder Strategic Credit.

The Royal London fund is held by two of the allocators on our database. This is a £1bn fund run by Paola Binns, and is top quartile in 2022 year to date. 

The Schroder Strategic Credit fund is just over £570mn in size and is one of the more popular strategic bond funds in our database, held by six of the allocators, with two buyers and one seller in 2022.

The fund is actually top quartile over the past three years, though it's testament to the scale of the underperformance that the fund achieved this with a 0.75 per cent return.

One of the interesting things about the Schroders fund is that its duration is dramatically shorter than most of the other popular strategic bond funds - only TwentyFour Dynamic Bond gets close.

(Though there's a caveat here of the Schroders fund is a credit fund with a flexible mandate, and doesn't invest in government bonds)

We discussed last week how some DFMs had taken a DIY approach to bond allocation due to concerns about the overly-long duration of strategic bond funds.

Brady's view is that he is better off owning investment grade funds right now, but where he does have high yield, he wants to own assets right at the top end of the market.

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