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Holly Cook: There’s been rather a lot of ‘bond bashing’ recently, not only in the market as a whole, but also at the recent Morningstar Investment Conference. To discuss what’s going on here I spoke to Stephen Snowden, investment manager at Kames Capital, and he explained what this bond bashing is all about. Here is what he had to say.
Stephen Snowden: Well, clearly, bond funds have been very a popular place for people to invest in over the last three, five years. I’m not surprised that’s irritated managers of other asset classes. I’m perfectly aware, as a bond manager, my asset class will become unpopular at some point in time, and I’m not telling people to buy bonds because you’re going to be fabulously rich by buying them. Their level of great returns that is unlikely to be replicated. But in terms of how do I respond to them, well, quite simply what I have to do is show them that the market is not irrational. Base rates are low for a very sensible reason, and likely to stay that way for a long period of time. The market is very accurately pricing in material rate rises in the future. Whenever I look at the markets, there is no irrationality. Low bond yields are a function of the economic environment we’re in, pure and simple, and I think what the equity managers sometimes miss is that they’re looking at the wrong bonds. They compare perhaps a 10-year gilt against equities. Equities are perpetual security; you really need to compare apples with apples. So if you compare perpetual gilts compared to perpetual equities, then you will find valuations are not as out of kilter as some might think they are.
Cook: So this low-yield environment that you described has caused quite a lot of innovation in the bond fund industry. Do you think that some bond fund managers are kind of taking too many risks, taking too many chances?
Snowden: As I said, as a bond manager, I’m very aware of the fact that my asset class is going to be out of favour and that’s just the way it’s going to be. I think as a fund manager you are in favour or you are out of favour. I do think there is a clamour perhaps by some fund groups that they are worried about this and they want to try to retain as much assets under management and fixed income, therefore come up with strategies to try to convince people to stay in bond funds. Well, I’ve got a more radical concept. If you don’t like bonds, don’t buy them, and I think at the end of the day whenever you alter the DNA of a portfolio too much, which I think some strategies are doing, then you lose the very essence of the bond, which is a different asset class, which is meant to respond differently from equity markets, meant to give you a more balanced holistic risk return in the diversified portfolio. And I think by tinkering too much with that, then you ruin the concept of the asset class in the first place. So I don’t support these radical approaches.
Cook: One of the ideas that has come about to try and help investors find that income is the retail-targeted corporate bond, and essentially what you were saying to us in the presentation was buyer beware. Can you explain a bit more about that?
Snowden: I welcome competition; keeps everybody happy and fresh, and there is no reason why people shouldn’t be able to do it themselves. So in that regard, retail-targeted bonds are a very good idea. What concerns me is that there is clearly an obvious reason why a company will go direct to consumers rather than go through a keeper like myself. What we’ve seen so far by many of the issues that have been launched is either the end investor ends up taking more risk in the bond the way it’s been structured relative to existing debt that I will perhaps invest in my funds or if the risk levels are the same, the yield you get is materially lower. So the companies that issue these bonds are doing it for their benefit, and not doing it for the end consumers’ benefit. I think what you might find is paying that professional fee might be very clever in the longer run. I am a fund manager who use other fund managers. I do not buy these bonds myself.
Cook: That’s really, really useful information. Thank you very much for joining us today.
Snowden: You’re welcome.
