There’s still a large degree of value across the fixed interest market, according to a number of industry professionals, particularly for those now willing to take on extra risk across their portfolio.
A recent FE Trustnet
article highlighted how fund managers have to look far and wide for value in the bond market at the moment
– a factor which is having a significant effect on the attractive of fixed interest funds.
), a multi-manager who heads up the EFA OPM Fixed Interest fund, thinks the best value in the bond market lies in the high yield area. He particularly likes European sovereign debt – an area which many believe is too risky.
“Since Q3 we were cautiously positioned, but we have slowly lifted our foot off the brake and begun to put it on the accelerator in that respect,” he said.
“A specific area where we see value in is European high yield bonds. We’ve increased our weighting in Invesco Perpetual European High Income
, for example.”
“We effectively have the back-stop of the ECB’s bond buying programme, which is a huge help. The Fed’s QE3 is definitely helping areas of the bond market as well, and we expect an announcement of the Bank of England in November to implement more quantitative easing measures.”
“We may get a rate reduction, and how low it will go will be interesting.”
Yousefian says the reduction in tail risks has also made banking debt a more interesting area.
“The Schroder Monthly High Income
fund is a good one for that as it has a high exposure to the sector, as does Rathbone Ethical Bond
. Investors should not be put off by the ‘ethical’ name as it doesn’t concentrate too highly in that area.”
“Because of the general reduction of tail risks, we think risk assets will perform well in the coming three to six months so Artemis High Income is a reasonably attractively positioned fund in that respect.”
“Also, with all this liquidity being pumped into the market, we like funds that have an amount of exposure to emerging market debt local currency.”
Like Yousefian, FE Alpha Manager David Coombs
), who heads the Rathbone Multi Asset Strategic Growth Portfolio
, believes the emerging market debt sector has a great deal of upside potential.
“We see a lot of value in emerging market debt local currency, although emerging market hard currency looks pretty tight,” said Coombs.
“To this end, we are invested in Investec Emerging Markets Local Currency Debt
. Clearly, there is more risk from local currency, but we feel that investors are being compensated by the spread over treasuries.”
“This asset class is highly correlated to high yield bonds, so we have been looking to add to our gilt duration position to mitigate overall portfolio risk. Whether we see ‘value’ in gilts is debateable, but if, as some research suggests, we get negative yields then there is value right now in gilts,” he added.
Jason Hollands (pictured right
), managing director at Bestinvest, is another fan of high yielding stocks – as long as investors are selective and back managers with established track records.
“We like funds that concentrate on high yield stocks,” he said.
“Government bonds are producing negative yields, with gilts now yielding at lower levels than interest rates.”
“Also, I believe that investment grade bonds have sucked in a lot of capital recently and I think the valuations are quite stretched.”
“As a result, I would recommend AXA Global High Income
, which has a high concentration to the US high yield market.”
“We like funds that hold high income, but have it for a shorter duration. This is because no-one knows how the global macro-economic environment will play out over the coming years.”
“In that respect, we also like Fidelity Strategic Bond
fund – headed by the very experienced Ian Spreadbury, who has delivered consistent returns over a long period.”
“If you want to invest in specifically short duration, then I would advise AXA US Short Duration High Yield Bond
Chris Wise, investment director at Gemmell Financial Services, agrees that investing in the right manager is more important than investing in the right market.
”I think from a returns perspective, everything that can be made has been made, as we are currently in a period of historically low interest rates,” he said.
“What we tend to go for in the fixed income sector is a corporate bond manager with a large amount of flexibility.”
“As a result, we like Richard Woolnough’s M&G Optimal Income
fund, as his mandate allows him to move between different investment areas very easily.”
“As IFA’s we don’t want to make specific calls in the bond market as things can change so quickly in the sector. Most want a flexible manager who knows the ins and outs and can make that call for you.”
“Woolnough can switch easily through government bonds, index linkers, investment grade, high yield bonds and even equities.”
The £9.6bn Optimal Income portfolio currently has 7.3 per cent in the equity market, according to FE Analytics
, including a top-10 position in Johnson & Johnson.
“We have a diverse approach and have a spread of managers in the fixed income sector, so I’d also go for the Invesco Perpetual Tactical Bond
fund for similar reasons,” he said.