Where bond fund managers are finding pockets of opportunity
Finding compelling investment ideas and solutions in global fixed income markets has hardly ever...
Believe it or not, it’s now six months since investors experienced the fastest plunge into a bear market in history – and a month since we recorded the fastest ever stock market recovery. To say it’s been a roller-coaster ride is putting it mildly!
But as markets bottomed in March, the opportunities became plentiful, and not just in equity markets: as the price of bonds also fell their yields increased and, for the first time in many years, the asset class was looking attractive. It led to some fund managers saying: “Bonds are the bargain of the century”; “It’s probably the best value investment grade market I have seen in my career”; and “Investors should be hoarding credit like they’re hoarding toilet rolls.”
And investors seemed to take note. Having seen nearly £7.5bn of net outflows in March 2020, investors were quick to plough straight back into fixed income with £6.7bn of net inflows between April and July 2020 (vs. £3.8bn for equities over the same period)*.
But have they been rewarded and was it the opportunity described? Six months on, we take a look at how some Elite Rated bond funds have performed and ask managers their views on the outlook today.
Looking at the three main bond fund sector averages, so far, so good: the IA Sterling Corporate Bond sector is up 11.29%** on average since 23 March 2020, and the IA Sterling Strategic Bond sector is up 13.04%**. You have to look back as far as 2012 for better returns over a whole calendar year***.
The IA Sterling High Yield Bond sector is up a huge 22.78%** – higher than any returns it has posted over the past 10 calendar years***.
Taking a closer look at Elite Rated bond funds, Man GLG High Yield Opportunities fund is the best performer since the market lows. From 23 March to 16 September it has returned 27.55%**. It is followed by GAM Star Credit Opportunities fund (22.51%**) and Aviva High Yield Bond fund (21.07%**).
|Rank||Fund||Percentage returns 23 March to 16 September 2020**|
|1||Man GLG High Yield Opportunities||27.55%|
|2||GAM Star Credit Opportunities||22.51%|
|3||Aviva High Yield Bond||21.07%|
|4||Schroder Sterling Corporate Bond||19.09%|
|5||Baillie Gifford High Yield Bond||18.81%|
|6||Invesco Monthly Income Plus||18.51%|
|7||Allianz Strategic Bond||18.41%|
|8||Artemis Corporate Bond||18.02%|
|9||M&G Strategic Corporate Bond||17.95%|
|10||Nomura Global Dynamic Bond||17.58%|
Jim Leaviss, manager of M&G Global Macro Bond, commented: “We’ve come a long way since the lows of March. Corporate bonds, which at their lows were pricing in investment grade and high yield default rates of 25% and 54% (23 March 2020) respectively, are now closer to fair value. Undoubtedly this has been driven mainly by central bank buying, particularly in high yield where we have seen – and can expect to see more – defaults.
“It’s hard to get excited about credit valuations at these levels. There is still some value in investment grade: these companies are the big employers, so it is politically easy (and arguably a decent policy tool) to support them.
“And despite the huge fiscal stimulus we have seen, it is difficult to be too bearish on government bonds now given the yield controlled world we live in. Bonds like bad news: while they are clearly very expensive, they do offer potential upside in the event that negative sentiment returns to markets in the second half of the year.
“One area in which I do see value is emerging market debt. Firstly, it offers higher real yields than developed market bonds. Also, emerging market currencies have lagged the recovery, meaning that some local currency bonds do offer attractive value (you can buy more per dollar).”
Chris Bowie, manager of TwentyFour Corporate Bond said: “We firmly believe the contractual nature of coupons versus the discretionary element of dividends means that predictable and attractive income will continue to be best provided from fixed income.
“However, the all in credit yield in many non-financial sectors is now lower than it was in January and February of 2020. To put that in context, back in January and February we were arguing that within investment grade credit, the valuations were such that reaching for risk was not justified. Now we have even lower yields in some cases.
“So the main area of optimism for us in the investment grade space is financials. By and large banks and insurers have given a good account of themselves during this crisis, in stark comparison to 2008 where they were the cause of the crisis. Twelve years on, capital is the best it has probably ever been, underwriting standards have been far better, meaning provisions have been remarkably low, emergency liquidity facilities exist to ensure no bank goes bust for liquidity reasons, and lastly, spreads still remain attractive.
Jeremy Smouha, who is on the investment board of GAM Star Credit Opportunities fund, talked to us about bank bonds in this podcast:
Stephen Snowden, manager of Artemis Corporate Bond, commented: “While premiums on new issues are now less attractive than they were over the months of April and May, they still offer a cost-efficient way of gaining exposure to attractive companies.
His colleague, James Foster, co-manager of Artemis Monthly Distribution, added: “Investment-grade and high-yield bonds continue to be the bedrock of our fund and they look set to continue to perform well. High-yield bonds face some pressure from higher defaults, but this is confined to specific sectors while many are performing very well, particularly given the amount of support from governments and central banks.”
Jonathan Golan, manager of Schroder Sterling Corporate Bond concluded: “This is really, for me, the golden era of credit because you’re just getting support all over the place, from governments, from shareholders, as long as you’re backing the right companies. I’ve been trying to buy mispriced debt rather than taking a top-down view – picking out industry leaders who just happen to operate in sectors impacted by the pandemic.
“To do this, I’ve set the standard that firms needed to be able survive at least a year with zero revenue and no outside support. For example, I picked up debt issued by Ryanair yielding over 20% and maturing in 2021. These are the sort of deals that I don’t think I’m likely to see in my career again.”
*Source: Investment Association, net retail sales of funds by asset class
**Source: FE Analytics, total returns in sterling, 23 March 2020 to 16 September 2020
***Source: FE Analytics, total returns in sterling, calendar years 2010 to 2019