Dogged by speculation that the multi-decade fixed income bull run is set to end, the current bond market has divided many investors over whether now is a good time or not to buy into the traditionally ‘safe’ asset class. 
Concern regarding the impending US interest rate rise combined with historically low yields in certain areas of the bond market have led to some investors reducing their exposure or even selling out of bonds altogether.
However Gordon Harding, an investment director at M&G, believes there are plenty of attractive opportunities in the market providing investors choose their funds and fund management houses carefully.
“People have been talking about the great rotation out of fixed income into equities for a long time and it hasn’t really happened yet,” he said.
“The fixed income markets are very much driven by the macro environment and different types of bond funds will perform differently in different environments. So in a falling growth or a falling interest rate environment, you essentially want to be in a gilt fund with very low risk.”
“But if we’re moving back into a world where growth is picking up, where inflation might be picking up and interest rates are starting to rise, then you ought to be taking credit risk. You want to be in more risky investments and we have funds that are actually able to offer a hedge against rising interest rates while at the same time giving access to credit risk which we think, at the moment, is quite attractive.”
M&G Investments’ fixed income team currently run 16 different portfolios and these range from pure high yield and emerging market funds through to fully flexible strategic bond funds. Indeed, M&G Optimal Income is the largest strategic bond fund in the Investment Association universe.
“Essentially, there will always be a product within the range that we offer that is able to provide a solution for investors,” he added.
Some would say that opting for a smaller boutique fund house is more attractive than choosing a larger company, due to that worries that larger businesses could be more institutionalised and managers’ inputs minimised.
Harding says this simply isn’t the case with M&G, despite its large size. And not only does its larger team allow for a broader range of products to suit different investors’ needs, team members in varying job roles still work very closely together and support each other’s efforts.
“We have a meeting each morning where the whole fixed income team gets together, all the portfolio managers, all of the credit research analysts, and anything that’s newsworthy that comes up will be discussed. It’s instant feedback for the portfolio managers, which you wouldn’t really get if you were just relying on external research,” he said.
Another benefit that Harding believes is unique to M&G is the in-house research team, which he says is an additional perk of being a larger fund management house.
He argues that the fixed income in-house capabilities of the company are second-to-none and allow managers to make important calls that may not be picked up by the market.
“The research team is very important to the investment process and each process differs between each portfolio,” he continued.
“At M&G we have 31 public research analysts and they are dedicated to doing all of the fundamental bottom-up analysis of every high-yield and investment-grade bond that we invest in across our portfolios.”
“We also have access to a separate team which sits in the US as part of our sister company PPM America. They have a similar-sized team of 22 research analysts that have essentially the same job.”
“These are all dedicated specialist credit analysts that don’t manage portfolios – they do the legwork in terms of going through company accounts, building spreadsheets, looking at companies’ balance sheets, going through all the bond documentation and ultimately coming up with an internal rating for all the companies that we invest in.”
Harding likens M&G’s rating system to those of major credit ratings agencies S&P and Fitch. While M&G’s process is similar, approximately 20 per cent of the company’s ratings differ from credit rating agencies’, which the investment director says can be slower to react to market events.
He adds that having an experienced team to conduct this level of in-depth research allows M&G’s fund managers to avoid spreading their time between company research, writing reports and visiting clients.
Not only this, the investment director says the risk with corporate bonds is highly asymmetric, which means a capable research team is particularly important within the asset class.
“When you have a new issue it comes at a price of 100 and when it’s redeemed at maturity, hopefully it’s redeemed at 100 as well, so your upside is relatively limited over that holding period,” he explained.
“However, your downside is pretty large because if the company defaults, you could potentially lose your whole investment. That’s why the credit research team is very important.”
This isn’t the only benefit Harding can see from having a large team supporting the funds.
“We have teams of investment specialists or investment directors who sit with the fund management team, who know the funds inside out and are able to talk to clients,” he said.
“Having a large amount of assets means there’s a great demand on our time to go out and tell investors how we’re positioned and what our views are. It all comes down to making sure the fund manager is managing money for as much of the time as possible.”
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