Snowden, who runs the £593m Kames Investment Grade Bond fund, says the severe lack of new issuance in the market means that any managers running multi-billion pound vehicles will not be able to shift their assets quickly in a sell-off. The manager (pictured) points out that equity markets, fixed income and other asset classes were very correlated in the aftermath of the financial crash of 2008, meaning that credit-specific positioning was irrelevant as macro forces drove the market; however, he says that is now changing.
"After Lehman Brothers, the percentage of portfolio variance explained by risk-on/risk-off jumped to almost half."
"In other words, a single global risk-premium dominated the price-behaviour of all equities, government and corporate bonds, listed real estate and commodities," he said.
"Since November last year, the explanatory power of risk-on/risk-off has fallen to pre-Lehman levels."
"That means you could argue that we are entering a stockpicker's market. What we have seen is that since Lehmans went bust, there has been a massive amount of correlation."
"Therefore it didn’t matter what you bought and sold, just as long as you bought and sold at the right time."
Snowden says a shift away from this kind of market will become a major issue for large corporate bond funds, but will only benefit smaller, more nimble portfolios.
"It is quite interesting to hear what my peers have been saying about liquidity in the market," he said.
"[M&G’s] Richard Woolnough said that 'daily volumes are on a par with where they were in 2007' while [L&G’s] Dickie Hodges has said 'anybody who says liquidity isn’t a problem is lying'."
"However, I tend to agree with [Invesco’s] Paul Read, who said 'liquidity in the corporate bond market can be pretty patchy'. That is exactly what liquidity is like in the current market: patchy."
"However, the bigger the fund, the bigger the problem. If you run £25bn, 1 per cent of that would be £250m. The market cannot take that; in reality, it can hardly take a fiver."
"What I mean by that is that if we do enter a world where stock selection becomes increasingly important and markets become uncorrelated, then the large funds in the corporate bond space will struggle to add value."
"The market has shrunk because of a lack of new issuance, which has led to a massive sea change in the supply-demand dynamic," he added.
The three largest portfolios in the IMA Sterling Corporate Bond sector are the $23.5bn Pimco GIS Global Investment Grade Credit fund, the £6bn M&G Corporate Bond fund and Invesco Perpetual Corporate Bond – which has £5.9bn worth of assets under management (AUM).
One of the managers who could be at risk if Snowden’s predictions were to come true is FE Alpha Manager Woolnough (pictured). He currently runs the M&G Corporate Bond, M&G Strategic Corporate Bond and M&G Optimal Income funds, which have combined AUM of £25bn.
At the time of writing, M&G was unavailable for comment.
Gavin Haynes, managing director at Whitechurch, says that while liquidity is undoubtedly an issue with corporate credit at the moment, he is still a fan of Woolnough’s style and trusts him to protect his investors.
"Liquidity is certainly something to consider when investing in the corporate bond market, as it is an issue in this environment," he said.
"Specifically, there is a time of stress later down the line where people start selling a lot."
"However, I would highlight someone like M&G as a team that do take a top-down approach and are not active traders. They use derivatives to dampen down their portfolios' volatility and risk."
"I would agree that liquidity is a risk, but at the same time it is a question we put to M&G every time we speak to them and we are comfortable in the way they manage their funds, not just the corporate bond fund, but across the wider universe."
"I would say that if we do see an environment better suited to stock/credit-specific pickers, then smaller, more nimble funds would benefit," he added.
Like Woolnough’s M&G Corporate Bond and Strategic Corporate Bond funds, Kames Investment Grade Bond is a top-quartile performer in the IMA Sterling Corporate Bond sector over five years.
However, unlike Woolnough’s fund, the Kames fund is also a top-quartile performer over one and three years.
Snowden joined Euan McNeil as co-manager of the fund in September 2011.
According to FE Analytics, the fund is a top-quartile performer since then, with returns of 21.17 per cent, beating its benchmark – the Iboxx GBP Non-Gilt All Stock Inv Grade Bond index – which has returned 10.1 per cent over that time.
Performance of fund vs sector and index since Sep 2011
Source: FE Analytics
Kames Investment Grade Bond has a headline yield of 3.18 per cent. The fund’s largest credit rating is in BBB bonds, making up 49.46 per cent of the portfolio. Its largest sector weighting is to the banks, at 14.4 per cent of AUM.
Kames Investment Grade Bond has an ongoing charges figure (OCF) of 1.31 per cent and requires a minimum investment of £500.
