Rathbones' Cazalis on why bond investors should love banks


The manager of the recently-launched Rathbone High Quality Bond fund has explained why more than half of the fund is so heavily overweight bonds issued by financial services companies.

Noelle Cazalis has invested more than half of the £220m fund into financial services companies of various types while the fund's sector, the IA Sterling Corporate Bond, only has a 15 per cent exposure to these companies.

Ms Cazalis said: "Looking at financials versus corporates, and looking at their credit fundamentals, financial are in much better shape. They had to face new regulation after the financial crisis so banks had to comply with holding more capital in their balance sheet and insurance is pretty much the same with Solvency II they have to hold more capital.

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"So effectively we get a sector which is in much better shape rather than if you look at corporates it has been very different behaviour.

"The cost of funding has declined dramatically for corporates so they have been issuing debt with very low coupons and with that debt they have been doing M&A, they have been doing share buybacks so that is detrimental to bond holders, especially in the case of share buybacks where effectively cash leaves the business.

"So you had on the one hand financials having improving fundamentals and deterioration on the corporate side. And when you then look at the valuation, the valuation is more attractive for financials than corporates. So it doesn't really make sense. We feel there is a level of mispricing here."

Ms Cazalis said the reason for this mispricing was that central banks had bought corporate bonds rather than financials as part of their quantitative easing programmes.

The Rathbone fund aims to preserve capital and pay an income by delivering a greater total return than the Bank of England's Base Rate plus 0.5 per cent, after fees, over any rolling three-year period.

It was launched in November 2018 and was made available to retail investors late last year.

Over the past year it has returned 3 per cent while its sector has returned 10 per cent.