Spreadbury: Corporate bond valuations look “stretched”
The FE Alpha Manager claims investment grade debt is oversubscribed and says he has had to take on more risk in his search for value.
By Joshua Ausden, News Editor, FE Trustnet
Tuesday August 28, 2012
It is becoming harder to find attractive valuations in corporate bonds, according to star manager Ian Spreadbury
, who believes prices in certain sectors of the market look stretched.
Although the FE Alpha Manager (pictured)
thinks talk of an asset-class bubble is overblown, he says the vast amount of money flowing into "safe haven" investment grade bonds means he has to look further afield for compelling value.
"The sheer weight of money flowing into corporate bonds has led to impressive returns so far this year," he explained.
"In this low interest rate environment, those assets that offer any reasonably sustainable yield will continue to be in demand and non-financial investment grade corporate bonds still fit the bill."
Performance of sector vs index in 2012
Source: FE Analytics
"Credit quality is holding up quite well - despite the squeeze on company revenues, profit margins have proved more resilient than expected."
"Those companies that have weathered the weak trading environment best over the past year have business models that show strong pricing power and/or benefit from growing demand in emerging markets."
"Sectors such as tobacco, food and drink, transport, pharmaceuticals and utilities include some of the strongest companies to invest in from a credit perspective."
"However, valuations are becoming stretched in some areas of the sterling market, particularly some of the short-dated bonds from the previously mentioned sectors. This means there are fewer compelling opportunities for adding sterling investment-grade credit risk."
As a result, Spreadbury is taking full advantage of the flexibility given to him by running a Strategic Bond fund. The manager’s £1.13bn Fidelity Strategic Bond
portfolio has no limitations on what it can hold in government, investment grade or high yield bonds.
According to FE data, Spreadbury currently has 21.6 per cent in high yield bonds – defined as those with a BB credit rating or lower – as well as 8.9 per cent in index-linked bonds.
He also has exposure to higher yielding government bonds, including a significant weighting to Australia and South Africa.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
Fidelity Strategic Bond has beaten its IMA Sterling Strategic Bond sector average over one, three and five years, with less volatility. The fund has a minimum investment of £1,000 and a total expense ratio (TER) of 1.21 per cent.