According to the IMA’s latest data, June saw £624m net redemptions from fixed income funds by retail investors – the highest ever – while commentators continue to bang the drum of the so-called ‘great rotation’ out of bonds and into equity markets.true
As Esther Armstrong pointed out yesterday, there remain bond funds out there that continue to deliver despite the headwinds, but it is talk of tapering that has really got investors in a fix, while the yield on 10-year gilts has moved from 2.3% to over 2.7% in the space of a month.
Charles Hepworth, investment director for GAM’s DFM business, goes so far as to say the traditional fixed income story is “pretty much dead”, preferring to access more esoteric styles of fixed income management through specialist absolute return vehicles. He sold out of sovereign debt completely in March – one of his “most astute trades” – and holds little in the corporate space.
Downside protection
“We sold out of 10-year gilts at 1.9% and they are now up to 2.7%; that’s quite a move in pure vanilla fixed income. We bought into local convertible bonds, an area we are very keen on with downside protection in that structure and upside participation in the underlying equity prices. We are also buying in to junior financial debt, which carry a floating rate option.”
He adds: “A lot of investors are not going to be aware of what has happened in the past month or so and may look at their portfolios and be dismayed that they have lost 8% on their more defensive investments since May.
“We’ve managed to avoid all of that by investing in vehicles such as the Alma Fund [Alma Doubleline Core Plus Bond], which takes strategic allocations to the whole fixed income universe from emerging market debt to US Treasuries to short duration to RMBS (residential mortgage-backed securities).”
Looking to alternatives
Delving deeper into these alternative approaches to bond investing must certainly be worth consideration, while according to Kepler’s latest Absolute Hedge report, Ucits credit absolute return funds have given the strongest annual returns (3.3%) this year compared to other absolute return categories, excluding multi-asset.
Still, others see opportunities. Ian Spreadbury, manager of Fidelity Strategic Bond Fund, says he has been surprised by the recent further back-up in government bond yields, but still sees value in gilts.
“Nominal GDP growth typically provides a useful yardstick for valuation and at 2.2% it is currently significantly lagging the 10-year gilt,” he says.
“Nevertheless, there is still scope for yields to go higher on the basis of uncertainty about tapering in the US. If the 10-year gilt hits 3%, I expect to see significant support from buyers seeing value. Furthermore, I don’t think the end of QE is in sight. Present day politics is such that if we get another contraction in growth and inflation remains contained, QE will continue.”
Hepworth, like many, invests in Standard Life GARS, but what does the future hold for that fund?
