By ROBERT HARLEY 29/04/2009
A few weeks ago we highlighted some of our preferred bond funds across three of the asset class’s sub sectors. This week we will take a more detailed look at one fund from each of these sectors, and touch upon some of their market sensitivities and performance expectations.
L&G Dynamic Bond
This is often referred to as a hybrid or strategic bond fund. The mandate provides the manager with the flexibility to swing the portfolio between cash, sovereign debt, investment grade (higher quality) corporate bonds and high yield (lower quality) corporate bonds, depending on where the manager identifies the most attractive risk /reward opportunities given the prevailing market backdrop. The structure of the fund also allows the manager to make active use of derivative instruments to manage the portfolio’s risk exposures or as a means of expressing his views. The manager aims to achieve a positive return irrespective of the stage of the economic cycle and prevailing interest rate environment. The L&G Dynamic Bond fund currently yields approximately 5.9%. This type of fund essentially carries more manager asset allocation risk, handled properly it should provide superior risk / return credentials over the cycle.
Threadneedle High Yield Bond
This fund focuses exclusively on Pan European high yield quality corporate bonds. These bonds have a higher coupon or yield because they carry a higher probability of default by the issuing company, consequently they are viewed as being more risky and more volatile. The price of high yield bonds tends to be driven primarily by the fundamental outlook for the issuer and, generally, they are less sensitive to changes in interest rates. As the economic environment deteriorated last year the price of high yield bonds fell as investors demanded a higher yield to compensate for a potential rise in defaults. Whilst default rates in the high yield bond market will rise through the year, we believe a lot of the bad news is already in their prices. The Threadneedle High Yield Bond fund is currently yielding about 11.3%. Because of the higher risk nature of the fund we feel it is suitable for more adventurous investors, although even a cautiously managed portfolio should have some exposure to High Yield to aid diversification.
Invesco Perpetual Corporate Bond
This fund invests predominantly in investment grade corporate bonds, the mandate also enables the manager to invest in gilts and may include a small exposure to high yield corporate bonds. Companies that issue investment grade bonds have stronger balance sheets relative to those that issue high yield bonds, consequently they offer investors a lower level of income since the risk of default is perceived to be lower. These bonds also tend to be more sensitive to changes in interest rates, their prices tend to rise as interest rates fall, and fall when interest rates rise. Historically, quality corporate bonds have been seen as a popular means of providing stability for a portfolio, however, last year returns for the asset class were undoubtedly poor - inspite of falling interest rates! - mainly as a result of the well documented problems encountered by the banking sector, whose bonds account for a large percentage of the quality bond universe. The challenges faced by the banking sector are possibly under control, given the level of government support for the sector. Whilst inflation is potentially a threat to the asset class, we do not believe it is a near term concern. The Invesco Corporate Bond fund currently provides a yield of 5.4%.
All yield estimates are gross of tax, net of annual management fees.