A whirlwind of global events has left bond investors wondering what comes next. Craig Rickman delves into the strategic bond fund peer group.
Wind the clock back 12 months and it would be almost impossible to predict the events that would follow. Equity and commodity market fluctuations have gone hand in hand with a series of dramatic political changes. Brexit shook the globe and may do the same, one way or another, to the UK economy.
Donald Trump’s US presidential election victory has now perpetuated this sense of global fragility, but the long-term effects are perhaps still too early to hypothesise.
This kind of instability should usually play into the hands of developed market government bond investors. And indeed prices have soared, yields on the likes of Japanese, German and Swiss debt have turned negative, and UK gilt yields have hit fresh record lows.
In the aftermath of Brexit, 10-year gilt yields plummeted to an all-time low of 0.52 per cent on 11 August. This followed US Treasury 10-year bonds suffering the same fate in July, with yields falling to 1.32 per cent. However, the outlook is far from certain.
More investors than ever before are now questioning whether bond prices have reached a peak, particularly if this year’s populist ruptures bring with them a new round of government spending.
Managers of strategic bond funds, who have the flexibility to seek the best quality opportunities in the global bond market, have other questions to ask themselves, too.
The high-yield corporate bonds that fill many of their portfolios have also had a strong run, but issuers of such debt are banking on a reliable economy and, in the case of energy companies, on an oil price rebound that has failed to materialise this year.
The range of options available to strategic bond funds can lead to a vast disparity in investment approaches, with some managers opting for short-term wins and others hoping for consistent performance over a longer period. This is another reason why investors should take great care when selecting funds to meet objectives.
Trump or slump?
Fund-flow data this year shows that investors have been seeking refuge in bond markets amid the political and economic volatility. Fixed income investments were the most popular asset class in August by some distance, according to the Investment Association.
Bond funds attracted net sales of £1.2bn, with the next most popular: mixed-asset funds, seeing net inflows of £412m. Strategic bond funds accounted for £264m of the fixed income total, which is second only to more conventional corporate bond fund counterparts.
Apprehension over the future of equity markets has undeniably driven this behaviour – stockmarkets such as the FTSE 100 have been pushed higher in recent months. Questions remain as to whether these movements are sustainable, similar to the debate being held among fixed income investors.
For a manager wishing to bump up returns in a bond portfolio, securities with a higher risk of default must be sought. The notion that fixed-interest assets are secure is something of a misnomer, as there can be a great disparity in the riskiness of individual companies.