Companies bonds are easier than government bonds to analyse risks and future returns, according to Silver-rated fixed income investor James Foster.
“If companies go bust, they have buildings and real assets to sell off which can honour bond holders debt, but with countries it is more difficult to do that,” he said. “Therefore countries are more difficult to analyse.”
This is why Foster prefers to invest in companies’ bonds when managing the Silver Rated Strategic bond fund for Artemis, which he has the flexibility to invest across the credit spectrum globally.
Citing the case of Greece in June last year, when the government was not able to pay off their debt one Monday, they declared a week of bank holidays. Some Greek banks remained closed for three weeks. Foster warned that investors risked receiving no compensation from governments if their bonds go bust.
No Protection from Low Interest Rates
Last week Bank of England Governor Mark Carney hinted that interest rates in the UK are likely to be cut this summer to tackle economic uncertainty following the Brexit vote. Foster believes that there is no real protection against falling interest rates for bond investors.
“By reducing interest rates lower, they are forcing everybody to take risk – that meant to get a boost to the economy. Investors have to take risk and that is almost deliberately the policy,” Foster said.
The current three-year gilt yield is just 0.2%, according to Foster.
“Because the market expects interest rates to come down,” Foster said. A 25-year gilt is currently yielding 1.6% as over that time inflation is expected to rise.
Investors should expect the theme of lower yields for longer, across both government and corporate debt, to continue for the foreseeable future, David Todd, head of global investment grade credit research at Invesco Fixed Income said.
Foster agrees, saying that “what is going on this moment is investors are hunting for yields” in weaker securities, which are high yield bonds with a lower credit rating. This means these bonds may struggle to go through an economic cycle and risk of going bust is higher than with investment grade debt. Despite this risk, Foster said he and his team balance the risk and buy high yield bonds with the potential of great return.
The Silver Rated, Artemis Strategic Bond fund has historically focused on issuers in the UK and Europe and more so in high-yield space with those, according to Mornignstar analyst Ashis Dash. The fund has 5% five years and 10 years annualised return. The fund has gained 3.7% year to date.
