Volatile times
There was a significant upturn in volatility across bond markets last year, due to the increasing uncertainty over the interest rate environment.
While rewards in long-dated corporate bonds have been more appealing, the volatility in these funds has been more akin to equities. Axa’s Sterling Long Dated Corporate Bond was the most unpredictable in the sector, displaying 13% volatility over the past 12 months. If you want to reduce portfolio volatility, you have to accept the low risk/reward ratio of short-dated bonds.
Liquid assets
Alongside volatility, liquidity concerns within the sterling corporate bond market must be considered when assessing exposure and fund choice. An interest rate shock could cause a run on the asset class and longer-term debt, in particular, could prove difficult to sell in a bond crisis. As stated earlier, we have already seen some significant redemptions in the sector and it is imperative that the larger funds have measures in place to manage the outflows.
Many are investing more derivatives and will impose dilution levies or swing pricing to ensure they can continue to make redemptions. While it is important to protect the interests of long-term investors, should there be any instances where investors cannot gain immediate access to their monies this could prove damaging for the asset class. The introduction of a formal ‘gate’ could hurt sentiment. There is plenty to think about for investors in the sterling corporate bond sector. If you are firmly in the ‘lower for longer’ camp then there remain attractive yields to be had among the longer-dated corporate bonds compared with the miserly returns available on government bonds.
There are also many managers who have long-term experience of being in the most favourable areas. Stalwarts such as Richard Woolnough at M&G, Reed and Causer at Invesco Perpetual and Ian Spreadbury at Fidelity remain among the most highly rated bond fund managers – and there is enough flexibility for them to seek out value. You cannot expect to see the returns from the sector that investors have enjoyed over the past five years and we have continued to reduce corporate bond exposure in 2015. However, I still see pockets of value in the asset class for shrewd active managers.
