The managers of the firm’s fixed interest fund range believe that while in historical terms there is not much to shout about, when taking events in recent years into account the debt spectrum is relatively attractive.
“We see value in the credit market, even after the rally over the past few years,” Isaacs explained.
“There has not really been a significant rally in corporate bonds over the past 12 months, and while there are $3tn worth of assets that yield negatively if you hold them to maturity, this should see the crowd move away from these assets.
“Leverage statistics in Europe look fairly healthy. It is worth looking at credit valuations compared to the end of 2013, which remain attractive.
“Investment-grade European companies have been the biggest beneficiaries of ECB QE. With the exception of European high-yield, most markets are around their long-run median and look relatively attractive to us.”
However, while Woolnough is also positive on the impact of QE, he is wary of the potential issues that could arise.
“When you look at where bond yields should be, the crux is supply and demand,” he said. “The ECB thinks that there are plenty of bonds around, but the issue is the price they will have to pay for them.
“If sellers decide to hold onto them for a bit longer then the ECB could find themselves paying expensive prices. The ECB has made policy mistakes before, and may make a mistake on easing or tightening in the future.
“Also, if Grexit does happen it is unlikely to pose too many problems for risk assets, but it definitely would not be a positive and in the short run could cause some challenges.”
Taking a slice of American pie
In his Global High-Yield Bond Fund, Isaacs’ biggest weighting remains in the US, equating to around 44%, while his second-highest is in the UK, at 20%. Sector-wise he favours telecommunications and media, which both account for 15% of the portfolio.
“Given how far behind the US the European economy is in terms of recovery, we feel that the US market is currently the better bet,” he explained. “US corporate bonds have an overweight in our portfolio.
But how does a Federal Reserve interest rate hike figure in his thoughts?
“The US economy is fine,” he said. “Unemployment continues to come down, and it takes time for monetary policy to take effect, usually around two years.
“When the Fed does put interest rates up they will do it slowly to avoid another situation like the shock in 2009. The question is how the market will react when it happens. There is a divergence between people who think that it will be accepted in the prices and those who think it will be a fulcrum of market activity.”
