"Corporates are paying well, especially financials, but the risk there is very high. There’s a 600 to 700 spread on RBS and Lloyds Banking Group, but a double-dip recession could see that wiped out. Bond investors want protection on the downside, which is why I’ve restricted my exposure to financials to 15 per cent. I’ve been increasing my credit Beta in my funds," the manager explained.
Spreadbury manages six funds, including Fidelity Moneybuilder Income, Fidelity Strategic Bond and Fidelity Extra Income. Our data shows they have consistently outperformed their peers over one, three and five years, and the two that have a long enough track record have also done so over a decade.
Performance of funds vs sector over 5-yrs
Source: FE Analytics
The manager says the current sweet spot is in high quality investment grade corporates, but that there is also selective value in high yield.
"Default rates are low, but I expect they will go up this year. I’m neutral on high yield. I think government bonds could be supported by low growth and low inflation, but valuations will be stretched," he continued.
"There’s limited value in government bonds and they look expensive, so investors are turning to corporate bonds. We’ve seen inflows into corporates and investors think they’re a middle ground. I think they’re good value."
The manager has recently added Gatwick Airport and Tesco property bonds to his portfolio, saying both are covered and are paying yields upwards of 5.5 per cent. Severn Trent is another new addition, with a 6 per cent yield. It is unsecured but Spreadbury thinks it is low risk and investors have the security of it being a regular utility company.
"The search for yield is key at the moment. Cash and government yields are down from over 5 per cent to around 0 per cent, while investment grade credit is also falling," he said.
"The key issue we’re facing at the moment is getting debt down and we’ll be in a low growth environment going forward. QE is more widespread, but there’s no evidence it is doing the job."
At the moment the manager is positioned around 20 per cent in government bonds, 20 per cent in high yield and 60 per cent in investment grade.