A beginner’s guide to corporate bond markets
I’m just going to say it: bonds are boring, stock markets are exciting. Why? Because stocks are...
Dr Niall O’Connor, manager of Brooks Macdonald Defensive Capital fund, got the ball rolling in early June, when he pointed out that traditional sources of income such as gilts (UK government bonds) have non-existent yields; cash is paying out less than 0.5% interest; and the UK stock market is forecast to have a yield of less than 3% in 2025.
In order to make up for these lower yields, he has been looking for what he calls ‘safe yield’ in specialist property investments, renewable energy and even music rights.
At the same time, Matthew Stanesby, co-manager of Close Managed Income, said in his podcast interview that while the dividend cuts in the UK may be deep, the dividends of US companies may be safer, as the market is more diverse and the political pressure is not on dividends but on share buybacks. The team at Close has exposure to this area of the market via Elite Rated JPM US Equity Income. Meanwhile, their infrastructure holdings are in things like hospitals, roads, schools, wind farms and solar farms – all investments benefiting from very long-term contracts, many of which are government backed.
And Mark Wright, co-manager of VT Seneca Diversified Income, told us how income generation is holding up better in the property sector in his podcast last week. “We’ve taken a very targeted approach,” he said. “We’re not looking for property exposure, we’re very deliberately targeting specific niches like GP surgeries and distribution assets – the kind of properties that are involved in logistics and the fulfilment of e-commerce, which as you can imagine has been a beneficiary of the pandemic.”
So we decided to find out what other Elite Rated multi-asset income managers are doing in their portfolios.
Premier Multi-Asset Monthly Income fund currently has 28% in UK equity income funds (including Man GLG Income and TB Evenlode Income), 45% in fixed income, 6% in property REITs and 14% in overseas equity income funds (including Fiera Magna Emerging Markets Dividend)*.
Lead manager David Hambidge said: “Having added a substantial amount of credit into the fund at the lows in the market in late March, we continued to increased exposure here in April, which has benefited performance. Emerging market debt also performed strongly. Japanese, European and global infrastructure equity holdings (which we added to in May) have also helped.”
Due to the diversified sources of income, the fund continues to deliver a regular and robust income stream, despite some dividend cuts that have occurred. But David has warned that, as a result of the economic impact of the coronavirus, the dividend payments by the fund may be lower over the next twelve months.
M&G Episode Income has around 50% in equities at the moment, but just 3% of this is in the UK. Instead, the manager prefers European equities (11.8%) and Japanese equities (13.4%). He also has 34% in government bonds – mainly from the US and emerging markets – 7.6% in corporate bonds (5% of which are high yield) and 3.5% in property**.
Manager Steven Andrew said: “We believe it is appropriate to keep a bias towards risk assets in the portfolio as there seems to be the potential for further upward re-ratings of equities, credit and emerging market government bonds.
“With inflation on a downward trajectory in many developing countries, their central banks have scope to reduce interest rates to support the local economies. We saw interest rates being cut in South Africa, Mexico, Brazil and Colombia during May.
“Of course, we are well aware of the risk of a further downturn, if infections begin to rise again or if the tension between the US and China escalates. If sentiment deteriorates, our meaningful holding of long-dated US Treasuries could provide some diversification.”
This multi-asset, multi-manager fund has 37.5% in fixed income (including Elite Rated TwentyFour Dynamic Bond), 19.3% in UK equities (including Montanaro UK Income), 10.4% in specialist assets and the rest in overseas equities**.
Gary Potter, co-manager of BMO MM Navigator Distribution, said: “Turbulence like we are seeing now is when active managers show their worth. The market falls are because the market cannot price what it doesn’t know – this is a crisis that is different and meaningful, but we will come through it and I think it will really change people’s perception of passives.”
Meeting managers is central to the team’s process, and they have developed a unique skill in finding specialist funds from boutique managers with a focus on sustainable high yield. The team spends as much time developing or researching new ideas as it does on the maintenance research. As they put it, “we like to be involved in a fund when it is building its track record rather than living off it!”
Artemis Monthly Distribution invests in equities (currently 42%**) and bonds (split 27.6% high yield, 23.6% investment grade and 6.9% government bonds – the latter being mainly US treasuries)**.
The managers said: “Companies have been taking advantage of central bank intervention in fixed income markets and new issues of corporate bonds have hit record highs – the US has seen 90% more already this year than in 2019. The fund’s best contributors in May came from oil-related issuers and we have been adding to better quality bonds.”
In terms of the equities in the portfolio, the managers are more positive than most: “Following discussions with the management of some companies, we would not be surprised if they resumed payments of dividends sooner than expected, as economies start to open up.”
*Source: Fund factsheet, 30 April 2020
**Source: Fund factsheet, 31 May 2020