The UK corporate bond market is not the most glamorous area of the investment world, and nor should it be.
Funds buying investment-grade debt are aiming for a quiet life of low risk and relatively low reward. In recent times, however, managers have been confronted by two developments that have threatened to rock the boat: outsized returns and external threats to stability.
In attempting to guard against the latter, the Bank of England (BoE) has twice over the past decade bought UK corporate debt as part of its quantitative easing programme. In doing so, the central bank has helped bolster a rally built on the foundation of rock-bottom interest rates.
But it is not just monetary policy that has affected how the market is viewed by participants and commentators alike. The BoE’s bond buying was briefly restarted just two years ago, in the aftermath of the EU referendum. The Brexit vote brought with it warnings of a different kind: that the domestic debt market might begin to wither away as London’s financial importance dwindled.
Funds in the Investment Association (IA) Sterling Corporate Bond sector can buy debt that is either sterling denominated or hedged back to sterling, so a shrinking market wouldn’t have presented an insurmountable problem for managers, advisers or clients. But Brexit has actually proved a boon of sorts to the market – simply because the weak pound has meant more UK companies are being taken over by foreign rivals. Acquirers often fund these deals by issuing bonds in the currency of their takeover targets, meaning UK issuance levels have remained healthy since the referendum.
That said, there are signs of increased nervousness over the amount of supply in the UK market. FTSE 100-listed Relx (formerly known as Reed Elsevier) was forced to scale back the amount of debt it issued in March – an unusual event that briefly caused ripples of concern in the market. That debt was denominated in euros not sterling, and there have been few alarms since then, but the episode served as a reminder that serene conditions cannot last forever.
Table 1, which ranks the top 20 corporate bond funds and trusts over the past five years, shows that the past 12 months have been slightly choppier sailing. But it is hard to make the case that the storm has already arrived: losses have been minimal thus far, and medium and long-term numbers remain very healthy.
As usual, there are caveats that should be observed before turning to the table in more detail. Most significant is the fact that funds which buy long-dated corporate bonds have been excluded. If these offerings were included, the rankings would look rather different. The bulk of the top 10 would be occupied by these funds, which buy debt that will mature in 20, 30 or more years. These funds are more sensitive than most to interest rate rises, and are typically only bought by institutional investors that need to match liabilities.