For many, the economic climate has been positive for bond investors; interest rates have remained low, while companies have been boosting their balance sheets offering attractive yields for credit.
In April this year, the sterling strategic bond sector kept its spot as the best selling of the Investment Management Association (IMA) sectors. The more flexible and potentially higher risk strategic bond funds available have proved popular as they cashed-in on attractive bond yields and improving corporate conditions.
The Henderson Global Investors Strategic Bond Fund announced recently that it had now raised £1 billion in assets under management, reflecting the popularity of the fund which has had a distribution yield of between six and seven per cent during the first part of 2011.
Director of UK retail at Henderson, Simon Hillenbrand, said: “Support for these funds has grown as they allow fund managers to actively allocate across the spectrum of fixed interest investments.”
Other popular strategic bond funds are the Invesco Perpetual Monthly Income Plus Fund which is a £3.3bn fund, and the L&G Dynamic Bond Fund which has £1.6bn under management.
Corporate bonds outlook
Michael Matthews (pictured), in the fixed interest team at Invesco Perpetual, and co-manager of the Invesco Perpetual Global Bond Fund, recently said high yield bonds were still a strong area but he was proceeding with caution when investing in high yield bonds as yields were coming back down to more normal levels.
High yield bonds are those issued by companies seen as less secure, with lower credit ratings, and a higher risk of defaulting on the debt. Because of this the coupon or interest paid on bonds is higher, a reward for the risk of holding these assets.
Following the 2008 financial crisis many companies were issuing bonds with attractive yields to finance their operations, in part because banks have been reluctant to lend.
If interest rates go up, bonds, particularly gilts, decrease in value.
Although Matthews does not expect a sharp rise in rates in the near future he said his funds were holding short duration UK government gilts which minimises the loss in value if interest rates rise.
The two elements of a corporate bond are its coupon and its face value. Once issued, the actual market value of a bond changes depending on what happens in the market or to the bond issuer. So investors can both gain from increases in the market value of a bond or lose from falls in that value.
The coupon is a fixed level interest payment but the value of the yield changes inversely when the face value changes.
So if a bond is paying five per cent on £1000 that is £50 interest coupon. If the market value of the bond falls to £800 it will still pay out a £50 coupon so the yield increases to 6.25 per cent.
While not all corporate bond funds are buying bonds from banks and other financial institutions it is part of the bond market where yields are particularly high.
Michael Matthews said: “Financials are one of the cheapest stories and are paying a considerably higher yield than the rest of the market.
“All UK financials have raised capital, are reducing balance sheet sizes considerably and are holding higher levels of liquidity.”
While this backdrop creates some uncertainty on profits for equity investors Matthews sees these factors as positive for bond holders. Banks are looking to raise more capital and are offering relatively attractive terms to funds buying their bond issues.
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