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Bull market in bonds isn’t over yet, says Webb

08 October 2013

SWIP’s Roger Webb says economic news is not as good as many people want to believe, meaning rates will stay low for longer.

By Thomas McMahon,

Senior Reporter, FE Trustnet

Investors will still be able to make capital gains in bonds over the next couple of years, providing they pick flexible funds, according to Roger Webb, manager of SWIP Strategic Bond.

ALT_TAG Webb says that talk of the end of a 30-year bull market is overblown, and there will have to be stronger signs of economic recovery before the environment turns decisively.

"Gilt investors might see negative returns, but I’m not too concerned about returns on bonds for the next couple of years," he said.

"There’s so much cash chasing yield that bonds are still in a great position."

"Rates will stay low for longer. You are seeing bond markets doing very well and equity markets could suffer some volatility."

"I struggle to see an environment where bond yields move naturally higher from here."

Investors have made money in Corporate Bond funds, Strategic Bond funds and High Yield Bond funds this year, according to data from FE Analytics.

The IMA Sterling Corporate Bond sector has made 0.66 per cent, IMA Sterling Strategic Bond 1.5 per cent and IMA Sterling High Yield 4.18 per cent. Only the Gilts sector has lost money, down 3.49 per cent since the start of the year.

Performance of sectors in 2013

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Source: FE Analytics

This would surprise anyone reading the dire predictions earlier in the year on the outlook for fixed interest. Many commentators warned that a 30-year bull run was coming to an end and that investors could stampede for the exit, causing prices to crash.

Although prices did fall off dramatically in the summer when markets became convinced that an end to quantitative easing was on its way, the subsequent backtracking on that point saw prices rise once more.

Webb says that this underlines the point that the economic news is not as good as many people wanted to believe, that the recovery will be slow, and that the case for bonds remains intact.

"I don’t see the strong recovery equity markets are starting to price in," he said. "I see an economic recovery that would suggest bond yields would move higher over time."

"I would like to see more evidence of a recovery before saying the bond bull market is over."

Webb says this slow pace of change is likely to see 10-year gilt yields rise from under 3 per cent to around 4 per cent in the next 18 months.


Even in such an environment, high yield bonds are likely to continue doing well, he points out.

"That would come around in an improving macro environment: credit [corporate bonds] would be doing very well and high yield very well," he said.

High yield has been the best-performing part of the market over the last three years, riding the coat-tails of rising equity markets.

Data from FE Analytics shows that the sector has a high correlation to the UK market – 0.74 over the past three years, much higher than the correlation of equities to the other areas of the fixed interest market.

Correlation of sectors and equities over 3yrs

  Name FTSE All Share
IMA Sterling High Yield 0.74
IMA Sterling Strategic Bond 0.63
IMA Sterling Corporate Bond 0.45
IMA UK Gilts -0.28

Source: FE Analytics

Webb says that he has been wary of putting too much into this sector, thanks to his cautious stance on the economic recovery.

"Within the high yield market we have been a little bit shy in terms of exposure to high yield," he said.

"We were a bit concerned the recovery wouldn’t take hold as it has done (or there wouldn’t be the perception that it has)."

"But high yield in a low default-rate environment has done very well: here Europe has started to show tentative signs of recovery and the US has done well and recently the UK has followed suit."

The fund has nonetheless managed to double the returns of the average fund in its sector over the past year, making 3 per cent.

Webb says he went into 2013 with a low duration of around 2.5 to 3, much lower than the 7.5 on the investment grade bond market.

"We raised risk in spring and early summer and the sell-off in June we used to add risk back," he said.

Over the longer term, the fund has outperformed the sector, producing second quartile returns of 19.04 per cent over three years, while the average Strategic Bond fund has made 16.32 per cent.

Performance of fund vs sector over 3yrs

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Source: FE Analytics

The fund has seen one period of underperformance in that time, in late 2011, when the manager says he was slow to add risk back into the portfolio.

It is available with a minimum initial investment of £1,000 and has ongoing charges of 1.4 per cent. It has four FE Crowns.
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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.