InvestmentsJan 17 2017

Funds buyers predict strategic bond sector split

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Funds buyers predict strategic bond sector split

Fund buyers have forecast that strategic bond managers will divide into two distinct camps in the coming year, with a more noticeable split between those guarding against a sell-off and those backing a “high-octane” high-yield strategy.

Selectors have also suggested the sector could see an uptick in interest after a troubling period for government bonds since the US election in November.

Tilney Bestinvest director of investment strategy Ben Seager-Scott, who last year opted to move away from some strategic bond mandates due to their penchant for stacking portfolios full of riskier high-yield debt, said he had begun to look for managers in the sector who were more defensive.

He said: “You will see a split between those who are looking for high yield and are prepared to be high octane and those looking to be defensive and lower duration.

“[But] I imagine a lot of managers will add to high yield, especially those who took some off last year.”

Jonathan Bell, chief investment officer at Stanhope Capital, agreed with Mr Seager-Scott’s prediction, and said the split would make it easier to switch between strategies.

“We’re aware that both floating rate and straight-up high yield will [fall] at some point, so we’ll hold them but we don’t know for how long.”

The CIO said he felt high-yield exposures still had some time to run, but acknowledged there would come a point at which he would turn defensive.

“We wouldn’t want to add to equity risk so it would be a re-allocation in fixed, and where tactical managers could add value.”

Figures from Bank of America Merrill Lynch showed $41.5bn (£34bn) was redeemed from bond markets in the last eight weeks of 2016 amid a sell-off in sovereign debt. The slump stemmed from the US, where expectations of tighter monetary policy are now accompanied by investors’ belief that incoming president Donald Trump will introduce an inflationary stimulus package.

Other government bonds, such as UK gilts, sold off in conjunction. The 10-year gilt yield rose to 1.5 per cent in November, from 1.2 per cent before the US election, though prices have since recovered slightly. High-yield debt, by contrast, continued a rally that began at the start of last year due to the recovering oil price.

In the UK, the Strategic Bond sector saw a small but significant £50m net inflow in November, making it the best-selling fixed income sector for the first time in more than a year.

Manulife global fixed income senior analyst Chris Chapman, who works on the firm’s Strategic Fixed Income fund, said taking a defensive stance was a prudent way to enter 2017.

The Manulife fund has 25 per cent in US high-yield exposure but this is in defensive sectors and floating rate notes, according to Mr Chapman.

“We’re expecting to be defensive and protective from rising interest rates and positioning the portfolio for an expectation of US dollar strength. We still have allocations to high yield and emerging markets but within that we’re being very defensive,” he said.

Kames fixed income specialist Adrian Hull said the asset manager still favoured high yield. Kames’ bond team instead mitigates risk using yield curve strategies and investment-grade carry trades.

“If you’re offering a strategic bond fund and don’t have the imagination to use all the instruments, you should manage a high-yield fund,” he said.