Corporate Bonds  

Are corporate funds bouncing back?

Are corporate funds bouncing back?

Sterling corporate bond funds have rebounded strongly since the bottom of the coronavirus sell-off in Q1 this year.

Most corporate bond funds are now positive for the year and many are close to recovering all the losses seen during March.

Corporate bonds sold off sharply in the first half of March as fears of the long-term effect of the coronavirus and the lockdowns designed to halt its spread finally caught up with markets.

The dash for the cash saw almost all assets fall as investors and businesses desperately tried to raise cash and a loss of market liquidity saw almost all corporate bonds fall sharply in value.

The injection of liquidity by central banks, coupled with new pledges to buy corporate bonds as part of market support initiatives, has seen corporate bond values return to pre-crisis values.

Lagging behind

Since the start of the year the average fund in the Investment Association Sterling Corporate Bond sector has returned 2.52 per cent, compared with -16.35 per cent for the sector average for IA UK All Companies.

However, as the graph below shows, UK Corporate Bonds have lagged UK Gilt funds as on average they have failed to provide as much downside protection during March.

UK corporate bond funds were hampered during the first half of March by the severe shortage of liquidity that made trading difficult.

In addition, the lack of flexibility in fund mandates meant corporate bond funds have had to ride out the market volatility without being able to seek shelter in less affected corners of the bond market or take advantage of price dislocation when markets recovered.

This market should, in theory, have played to the strengths of strategic bond funds, which should have been able to use their greater flexibility to take advantage of the protection of gilts in the early sell-off and profit from the greater sell-off in high-yield bonds and subsequent sharper recovery.

This has not played out in practice, as the IA Sterling Strategic Bond sector has lagged the conventional bond sector in 2020, but one fund that has fully demonstrated the potential returns available for unconstrained bond funds in such volatile markets is Allianz Strategic Bond.

Since January 1, this fund has returned 26.2 per cent compared with the sector average of 1.05 per cent. Managed by Mike Riddell and Kacper Brzezniak, the fund produced strong performance both in the bond market sell-off before fully capitalising on the recovery.

Between February 21 and March 20 the fund was the best-performing fund in the IA Strategic Bond sector, and one of only three funds in the sector to produce a positive return (5.31 per cent). As markets bounced back, the fund produced the second-best returns in the sector, returning 15.54 per cent between March 20 and April 31.