Bond investors have been very well rewarded for a generation and particularly since the period after the financial crash, with the average corporate bond fund returning more than 50 per cent over five years while the average high yield fund has returned more than 100 per cent. However, there is a widely held belief that fixed income is coming to the end of a multi-decade bull run.
Performance of sectors over 5yrs
Source: FE Analytics
In fact, following extremely low gilt and Treasury yields and news breaking in May last year that the Fed planned to taper its quantitative easing programme, swathes of bond holders have been hit by capital losses.
Winship, head of sterling fixed income at BlackRock, says that the events of last summer showed that too many bond managers have been ignoring their primary objective of defending their investors' capital.
“A lot of people recovered from that, but it told an interesting story. We have been talking about bond bubbles for ages, but when looking at the performance of my industry, it really was very disappointing,” Winship said.
A recent FE Trustnet article pointed out that the best-performing bond funds over a five-year period have been those with the highest correlation to equities.
While this has meant that a number of bond funds have delivered very high returns over the last five years, a lot of them have failed to protect their investors during times of volatility.
Our data shows, for example, that between May and June last year, the average fund in the IMA UK Gilt, IMA Sterling High Yield, IMA Sterling Corporate Bond and IMA Sterling Strategic Bond sectors all lost more than, or close to, 3 per cent.
Performance of sectors between May and June 2013
Source: FE Analytics
Winship says that attitudes towards bonds need to change, as not only have bond managers been taking a lot of risk, but at the same time, investors in their funds think that they will keep seeing a high, almost risk-free, return.
He says that bond investors have had it remarkably easy over the last quarter of a century, but warns them that the future is likely to be very different.
“I’ve been in fixed income for the last 25 years and, in my career, yields have generally fallen,” Winship said.
“It’s been a really nice time, but that is no longer the case. If you look at how a lot of fixed income performed last May and June, despite the fact there was a lot of chat suggesting that managers were changing, it didn’t tell me that we have done much about it.”
“You don’t buy fixed income to lose 2 or 3 per cent over two or three months, you don’t – in my world – buy fixed income to make 2 or 3 per cent over a couple of months, that’s why you buy a hedge fund. You buy fixed income because it is consistent and safe.”
“It’s not the risky part of your portfolio. For years the business has been moving down the credit quality spectrum and you have a lot of stuff that you just can’t sell [because of liquidity restrictions] and a lot of stuff that, when things get tough, the price volatility is high.”
He added: “We have to go back to basics, just try and make it boring again. That’s what fixed income is for.”
FE Alpha Manager Jenna Barnard, who heads up Henderson Strategic Bond, recently told FE Trustnet that the fears surrounding inflation have been overblown. As a result, she says investors have been too quick to sell their bond exposure.
The manager adds that a lot of investors have sold their traditional bond exposure in search of a higher level of yield or rate of return, which means they are now taking on a lot of risk.
“I keep reading reports where people are buying bond proxies; well that was fine last year,” she said.
“Last year there wasn't a classic risk-off scenario. Risk-off is where equities fall and bonds rally. Last May we didn't get that they both sold off, people kind of forget that. It will be very interesting to see the risk profile of some people's portfolios.”
“This year has been a classic year when equities have fallen and bonds have rallied hugely. I’m amazed at how short people’s memories are that based on last year’s experience they are forgetting the value of bonds as a diversifier.”
“You just don't get that from these alternative assets.”
Winship heads up the BlackRock Absolute Return Bond fund, which has delivered a positive return in each calendar year since its launch in September 2011.
It has delivered a cumulative return of 6 per cent over that time.
Performance of fund since Sep 2011
Source: FE Analytics
However, his fund was also caught out by the sell-off in May and June last year – when it lost 1 per cent – but the fund's process and philosophy have remained the same.
“I don’t think now you can just swing the bat, it’s a lot more subtle and intricate now. You can’t just have the big harum-scarum trades and then get them right. If you have that one trade, good luck to you, it might work but if it doesn’t, try and get out of it because there is a lack of liquidity,” Winship said.
The fund requires a minimum investment of £1,000 and its clean share charges are 0.88 per cent.
