The graph below illustrates Frewen’s statement that sentiment and, therefore, performance for the different asset classes within the fixed income universe is far from uniform. The Gilt and Global Bonds sectors saw their performance rise almost exactly at the same time as the performance of the Sterling High Yield and Sterling Corporate Bonds sectors began to fall.
Source: Financial Express Analytics
Frewen highlights the example of the performance of the European High Yield and European Sovereign Bond markets to illustrate his point.
As a result of negative sentiment and risk aversion, the period from July 2007 to August 2008 saw a total return for the European High Yield market of -8.5 per cent. Then when Lehman Brothers collapsed in September 2008 sentiment for high yield bonds fell even further – the European High Yield index fell by 25 per cent in the space of a few weeks.
"Concerted central bank and government intervention has eventually led to an improvement in risk appetite and this, together with recognition that the market reaction had been too extreme and was discounting significantly greater levels of defaults than could be rationally expected, has seen a significant recovery in this market," says Frewen.
The recent performance data has been much more encouraging. In the six months to 28 September 2009 the Merrill Lynch European High Yield index rose over 55 per cent, more than recouping the negative performance suffered in the second half of 2008.
The performance of the European High Yield market contrasts sharply with that of the European Sovereign Bond market.
As economic conditions worsened in the autumn of 2008 investors flocked to low risk sovereign debt however performance for most of 2009 has been more muted. Threadneedle believe that this muted performance is "as a result of credit quality concerns for some European Sovereigns; investor concerns over medium term inflation risks and the volume of current and future government bond issuance. Of equal importance has been the return of risk appetite to other asset classes, and rotation away from lower risk investments."
Predicting the timing of these ebbs and flows in the bond markets is a difficult task for an investor, but fund managers with expertise across the bond universe should be able to take advantage of these rotational markets and deliver positive returns to investors throughout the investment cycle.
Funds within the IMA Strategic Bond sector can allocate assets between high yield bonds, investment grade corporate bonds and government bonds depending on where the value is. The sector has returned an average of 10.28 per cent in the year to 28 September 2009.
The fund with the best one year performance figures is L&G’s Dynamic Bond, which has returned 43.4 per cent. The fund has an unconstrained approach to asset allocation and may invest in investment grade and subinvestment grade securities with a credit rating from Standard & Poor’s and/or Moody’s or which are listed or traded in an OECD Country. Using the tools permitted under UCITs III rules, the fund uses a derivative overlay to seek opportunities to enhance portfolio returns.
| Name | 6-mth | 1-yr |
| L&G Dynamic Bond |
31.68 | 43.4 |
| Jupiter - Strategic Bond |
38.08 | 26.34 |
| M&G - Optimal Income |
24.95 | 25.62 |
| Aviva Inv - Strategic Bond |
26.49 | 24.5 |
| AEGON - Strategic Bond |
43.35 | 23.52 |
| IMA Sterling Strategic Bond |
24.62 | 10.28 |