It’s been a long, tough haul for fixed income investors. Many must be tired of hearing the same, relentless, bad news: low or negative yields, flat growth, low interest rates, high corporate defaults.
Typically fixed income is seen as the shy and sensible friend among racier investments. But are there, at last, glimmers of excitement on the horizon for this much put upon asset class?
With the exception of the US, central bankers remain averse to any signs of interest rate rises as far as the eye can see, preferring to expand quantitative easing and in certain cases even reducing rates.
Earlier this month, the European Central Bank’s Corporate Sector Purchase Programme kicked in, details of which were announced this spring, and kicked in earlier this month with programme set to continue through to March 2017.
David Jane, manager on Miton’s multi-asset fund range, said with the markets so focused a potential Brexit and the Fed’s decision over interest rates, the ECB’s asset purchase extension has gone relatively unnoticed.
Yet having announced details of the plan in April, markets have three months to adjust and the cost or borrowing in euros for large companies has already been pushed down, in some cases to below zero.
Increased Appetite for High Yield Bonds
“As long-term investors, focused on achieving a reliable and positive return for our investors, we can see no merit in buying bonds with negative yields,” he said.
With the ECB making such a strong show of support for the asset class – not just in policy terms, but now directly – it’s hard to see where any extra yield will come from as compression takes hold, says Chris Higham, the head of credit multi-strategy fixed income at Aviva Investors.
Higham runs a number of bond funds across the spectrum, including the four-star Aviva Investors Corporate Bond and three-star Aviva Investors Strategic Bond funds, as well as the five-star Aviva Investors High Yield Bond fund. He said there has been greater appetite for his high-yield products this year than he had seen in several years and expects the market in Europe will only get bigger and better.
“Europe and the US are about the same size in terms of their economies, the banks are about three times the size they are the US, and yet the European bond market is only about one-third the size of the US.
“Over the next 10-20 years I expect the high-yield European bond market to grow substantially, I see no reason why it shouldn’t be the same size of the US.”
Increased Sales of Fixed Income Funds
According to latest statistics from trade body the Investment Association, fixed income was the best-selling asset class in April with net retail sales of £679 million, this compared with a net retail outflow of £265 million in March.
Further, its two main sectors – IA Sterling Strategic Bond and IA Sterling Corporate Bond, saw a significant pickup in assets on the previous month – the former in particular, rising from just £35 million in net retail sales in March to £191 million in April.
Adrian Lowcock, head of investing at AXA Wealth, recognised there was a dip in sentiment towards strategic bond funds earlier this year, which he suggests would have followed the drop in high yield – a victim of the weak energy sector.
He said while last year there was a degree of uncertainty around the direction central bankers would take interest rates, that has now stabilised, with little – if no – expectation of any rate rises for the foreseeable future.
“The interesting thing is that you would expect that the investment grade space would be more appealing if interest rate rises were not on the horizon.”
Challenge Facing Bond Investors
For James de Bunsen, fund manager in the multi-asset team at Henderson Global Investors, says he sympathises with the challenge faced by bond investors. Many are forced to hold a meaningful allocation of fixed income, yet government bonds are offering nothing, and investment grade bonds, he says, will fail to give a decent risk-adjusted return.
And while most strategic bond funds tilted heavily towards high yield in 2015 – and this was the right move at the time – when the bottom fell out of the sector in the second half of last year, they were left overexposed.
“Investment grade looks pretty fully priced now, high yield has bounced back. But we hold two that are not your run-of-the-mill strategic bond funds.”
Look Beyond Conventional Bond Funds
He names the four-star MI TwentyFour Dynamic Bond fund, a seemingly more nimble vehicle run by Gary Kirk and his team, which he said has been less reliant on the high-yield sector, and the Bronze Rated PIMCO Income fund.
“The PIMCO Income fund is US-based, so it has a different focus; it invests in things like mortgage-backed securities, and it took on more duration than most of its peers.
“Many of the strategic bond funds were simply getting a very easy ride off the back of high yield. But you need to careful because it’s likely as an investor you will have direct allocation to high yield as well, so you are in effect doubling up.”
