Fidelity’s Spreadbury, manager of the Moneybuilder Income fund, insists there is still value in the corporate bond market and that the record low yields seen on corporate bonds still have scope to go lower.
"These concerns are valid, but the recent hysteria around corporate bonds and in particular market liquidity is exaggerated in my opinion," he said. "While the average bid-offer spread on sterling corporate bonds has widened significantly, it is important to put this in context with market valuations."
"Today, the bid-offer spread represents a smaller portion of the total credit spread; less than 5 per cent according to our traders."
"This means that investors are actually being handsomely compensated for the lower levels of liquidity that we see today."
"Of course, you may think that as manager of one of the largest funds in the IMA Sterling Corporate Bond sector, I have a vested interest in taking this stance."
"I would disagree, however. The position I am in ensures that I constantly think about these issues and the best methods to tackle the current challenging environment," he added.
The manager admits trading is more difficult, and more expensive, than before the financial crisis in 2008, but says he has ways to deal with these issues.
He commented: "In the event of larger-than-normal redemptions, I am more likely to trim exposure to a broad range of bonds in small deal sizes and consequently at small bid-offer spreads."
"I believe this is a better option than eliminating the weakest credits that may incur higher trading costs or prove harder to trade."
"Portfolio structure is important too. I always ensure the fund is well diversified, generally limiting exposure to any one issuer to no more than 3 per cent of the fund’s assets," the manager added.
A spokesperson for M&G says the group does not have any concerns over the liquidity of its multi-billion pound bond funds, even though it recently announced it was exploring methods of slowing inflows.
"Richard Woolnough is entirely comfortable with the liquidity of his funds and his ability to meet large redemptions quickly," the spokesperson said.
"As at the end of June 2012, approximately 9.5 per cent of the portfolios (or £1.1bn), including the M&G Corporate Bond fund, was still held in cash or gilts."
Woolnough’s sought-after four crown-rated M&G Corporate Bond and three crown-rated Strategic Corporate Bond funds are among the best sellers in the sector, with £6.5bn and £5.7bn in assets under management (AUM) respectively.
Spreadbury’s Fidelity Moneybuilder Income is also in high demand, with £3.3bn AUM.
All three portfolios have delivered top-quartile returns over five years and the Fidelity Moneybuilder Income and M&G Corporate Bond funds are top-quartile performers over 10 years.
The M&G Strategic Corporate Bond fund does not yet have a 10-year track record, but is the best performer of the three over five years, returning 65.80 per cent.
M&G Corporate Bond has returned 52.88 per cent over this time, compared with 39.35 per cent from the Fidelity portfolio and 31.7 per cent from the IMA Sterling Corporate Bond sector.
Performance of funds vs sector over 5-yrs
Source: FE Analytics
However, all three portfolios sit in the second or third quartile over the medium-term, and have delivered bottom-quartile results over one year.
The funds are also among the lowest in terms of yield, preferring to remain in defensive government and investment grade bonds rather than move down the credit ladder in search of income.
Both M&G portfolios sit in the bottom quartile, yielding less than 3.5 per cent, while the Fidelity fund is in the third quartile, yielding 3.63 per cent.
The highest yielding fund in the sector is Thesis Optima Bond, which pays out 8.37 per cent.
Invesco Perpetual, which houses Paul Causer and Paul Read’s £5.8bn Invesco Perpetual Corporate Bond fund, was unavailable for comment.