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Inestors are now pay­ing to hold a third of the debt is­sued by de­vel­oped mar­ket gov­ern­ments, and yet yields con­tinue to fall – even where they are al­ready neg­a­tive. Bonds, for gen­er­a­tions a sta­ple hold­ing in a mixed port­fo­lio, in many cases now guar­an­tee own­ers a mod­est loss. They also pose the risk of a po­ten­tially large cap­i­tal loss, lead­ing to some of the big­gest fans of these as­sets warn­ing savers to sell up and switch into cash.

Neg­a­tive yields on bonds (see Page 3 for a full ex­pla­na­tion) arise be­cause low in­ter­est rates have forced in­vestors to chase yield, driv­ing up the prices of in­come-gen­er­at­ing as­sets and in turn crush­ing their yields.

The ex­trem­ity of the mar­kets – the de­ci­sion in Amer­ica to hold in­ter­est rates de­pressed yields fur­ther on Thurs­day – has led to some of Bri­tain’s big­gest bond own­ers turn­ing sour on the sec­tor. Richard Wool­nough, who runs the £15.5bn M&G Op­ti­mal In­come fund, told in­vestors that fall­ing bond yields meant fixed-in­come as­sets had lost their ad­van­tage over cash (his com­ments are on Page 3).

Mr Wool­nough said that un­til re­cently bonds held their edge over cash be­cause the in­come on of­fer com­pen­sated in­vestors for the po­ten­tial cap­i­tal losses. How­ever, with bonds now of­fer­ing min­i­mal or no in­come, that risk of cap­i­tal loss has be­come too great.

It’s not the first time a feted bond fund man­ager has warned on mar­ket con­di­tions. Three years ago bond fund man­ager Chris Bowie, who then ran money for fund group Ig­nis and is now at Twen­tyFour As­set Man­age­ment, warned in­vestors to sell. At the time, his warn­ing was based on bonds’ fail­ure to yield more than in­fla­tion. To­day, al­though in­fla­tion has fallen, the sit­u­a­tion is worse – with many of the same bonds yield­ing noth­ing or less than noth­ing.

Cash is the an­swer for many pro­fes­sional port­fo­lio man­agers, with cash po­si­tions reach­ing lev­els un­seen since the pe­riod af­ter Lehman crash in 2008, ac­cord­ing to the lat­est of reg­u­lar sur­veys by Bank of Amer­ica Mer­rill Lynch. When quizzed on why cash lev­els were high, fund man­agers said they had a bear­ish view on mar­kets and pre­fer cash over lowyield­ing equiv­a­lents.

What’s more, 82 per cent of the man­agers be­lieve bonds is­sued by de­vel­oped mar­kets are too high. But the prob­lem is spread­ing out into other as­sets, as in­vestors crowd into high-qual­ity stocks, US and Euro­pean cor­po­rate bonds and emerg­ing mar­ket bonds.

So what does this mean for in­di­vid­ual in­vestors?

Laura Suter

Mike Deverell, in­vest­ment man­ager at Equi­lib­rium As­set Man­age­ment, said the cur­rent mar­ket means the tra­di­tional in­vest­ment model of 60pc stocks and 40pc fixed in­come – qual­ity bonds – is “dead”. He has re­duced eq­uity and fixed in­come ex­po­sure in his port­fo­lios and built up cash. Tom Steven­son, in­vest­ment direc­tor at

Fi­delity, the fund man­ager and bro­ker, said that around $13 tril­lion of gov­ern­ment bonds are now of­fer­ing neg­a­tive in­ter­est rates, a “pretty ex­tra­or­di­nary state of af­fairs”. “It is fair to say gov­ern­ment bonds at to­day’s prices are very unattrac­tive,” he said.

“Why would you lend money know­ing you’re go­ing to get a neg­a­tive re­turn? In large parts of the mar­ket you are get­ting close to zero or neg­a­tive yields. For an ev­ery­day in­vestor what is the point, par­tic­u­larly as they are go­ing to pay a fee on top of that for a fund?”

The only rea­son an in­vestor would hold these bonds is if they be­lieve in the “greater fool the­ory”, said Mr Steven­son: “Buy­ing bonds at these prices only makes sense if some­one else will pay an even higher price than you, and that doesn’t seem like a very pru­dent ba­sis for an in­vest­ment.”

But with Bank Rate at 0.25pc and pos­si­bly set to fall fur­ther, and sav­ings ac­counts of­fer­ing next to noth­ing, cash is not ap­peal­ing.

“I think as a short-term so­lu­tion it makes sense but as long-term move cash ab­so­lutely doesn’t make sense,” said Steven­son.

In­stead, in­vestors have two op­tions: ac­cept lower re­turns or move up the risk spec­trum.

Lee Robert­son, chief ex­ec­u­tive of wealth man­ager In­vest­ment Quo­rum, said in­vestors have to “re­set” their ex­pec­ta­tions of the kind of in­vest­ment world we are liv­ing in.

Cor­po­rate bonds, al­though riskier than those is­sued by gov­ern­ments, can of­fer bet­ter re­turns, but only in pock­ets of the mar­ket. The hunger for yield has now fil­tered through into the cor­po­rate bond mar­ket, too, and some cor­po­rate bonds from blue-chip com­pa­nies are trad­ing at neg­a­tive yields – just like the gov­ern­ment debt of de­vel­oped economies.

This has been made worse in Europe by the Euro­pean Cen­tral Bank’s pro­gramme of buy­ing cor­po­rate bonds as part of its “quan­ti­ta­tive eas­ing” pro­gramme, a move the Bank of Eng­land is now fol­low­ing.

“Neg­a­tive rates have stretched out into cor­po­rate bonds, and some of the stronger com­pa­nies are is­su­ing debt close to 0pc, but those aren’t wide­spread and cor­po­rate bonds still look at­trac­tive gen­er­ally,” said Adrian Low­cock of Ar­chi­tas.

Unilever, the com­pany be­hind house­hold brands such as Per­sil, Walls and Hell­mans, has is­sued a bond pay­ing no in­come; while bonds from com­pa­nies such as health­care gi­ant John­son & John­son and in­dus­trial com­pany Gen­eral Elec­tric al­ready have neg­a­tive yields.

One way to nav­i­gate this is to use strate­gic bond funds, where man­agers have the re­sources and time to ad­e­quately re­search the parts of the mar­ket that are pay­ing a de­cent in­come, ad­vis­ers say.

“We like strate­gic bond funds,” said Mr Deverell, “which tar­get higher yield cor­po­rate bonds and are safer. You can get 4pc to 5pc dis­tri­bu­tion, which is a lot bet­ter than you get from gov­ern­ment bonds.”

How­ever, Jenna Barnard and John Pat­tullo, man­agers of the £1.7bn Hen­der­son Strate­gic Bond fund, have warned in­vestors to ex­pect lower yields across the mar­ket.

Mr Pat­tullo warned in­vestors will con­tinue to get in­come from bonds, but that ”cap­i­tal gains from here is get­ting a lot more chal­leng­ing”. Away from bond mar­ket, in­vestors who are will­ing to take on more risk can still find re­turns.

“Bond proxy” com­pa­nies, the likes of Unilever and Proc­tor & Gam­ble, “still of­fer a higher and sus­tain­able div­i­dend in­come,” said Mr Steven­son.

“Eq­uity in­come re­mains pretty at­trac­tive. In many cases you have got blue chip com­pa­nies of­fer­ing higher in­come on their eq­uity than the bonds they is­sue, so eq­ui­ties are a bet­ter hunt­ing ground for in­come than bonds,” he said.

Unilever, for ex­am­ple, cur­rently yield­ing 2.7pc, has in­creased its quar­terly pay­outs this year so far. These com­pa­nies are pro­tected against any po­ten­tial down­turns, as they have solid re­peat busi­ness, said Mr Low­cock. “But if the econ­omy grows more ag­gres­sively than it has been do­ing, then ‘ bond prox­ies’ don’t tend to do so well.”

Eq­uity in­come funds are one way for in­vestors to ac­cess a range of these com­pa­nies in one place. Mr Robert­son said the New­ton Global Higher In­come fund and in­vest­ment trusts, such as City of Lon­don, were cur­rently of­fer­ing good yields.

De­spite re­cent scares over prop­erty funds, which saw a num­ber of “ope­nended” com­mer­cial prop­erty funds pre­vent­ing with­drawals amid panic af­ter the Brexit vote, op­por­tu­ni­ties re­main in the prop­erty sec­tor for de­cent yield.

Mr Deverell has made a “small al­lo­ca­tion” to the Kames Prop­erty In­come fund, which is cur­rently yield­ing 5.75pc and is 9pc cheaper than be­fore the ref­er­en­dum. The fund also has no al­lo­ca­tion to Lon­don prop­erty – an area Mr Deverell thinks is more prone to de­val­u­a­tion.

“Don’t dis­count prop­erty,” said Mr Robert­son, who is in­vested in the F&C Com­mer­cial Prop­erty trust. “It has When in­vestors are fear­ful of shares and other risky as­sets, they buy gov­ern­ment bonds, driv­ing up their prices. In ex­treme times, as now, the price paid can be higher than the face value of the bond plus the in­ter­est that re­mains to be paid be­fore it ma­tures. A loss is guar­an­teed for those hold­ing to ma­tu­rity. The greater the fear in the mar­ket, the greater the loss in­vestors will be pre­pared for. Oth­ers will hope to profit if fur­ther panic drives prices yet higher.

had a bit of a rocky time but it seems to be com­ing back.”

Other ar­eas where Mike Ping­gera, man­ager of the San­lam FOUR mul­ti­as­set fund, is un­earthing in­come, in­clude in­fra­struc­ture, re­new­able en­ergy and stu­dent ac­com­mo­da­tion.

In the in­fra­struc­ture space he has moved into the HICL In­fra­struc­ture trust and 3i In­fra­struc­ture, which are yield­ing 2.5pc and 3.8pc re­spec­tively. “Real as­sets pro­duce an in­come im­me­di­ately but with long-term link­age to in­fla­tion,” he said.

“I think it is a chal­lenge for ev­ery­body, there is no doubt about it. Gen­er­at­ing re­turns will re­main a task,” Mr Ping­gera said.

“I do think that it is right to ex­pand in­vest­ment hori­zons. You can make in­cre­men­tal in­creases to the yield of the over­all in­vest­ment port­fo­lio by tak­ing small po­si­tions in dif­fer­ent things and col­lec­tively push up in­come,” he said.

How­ever, Ping­gera, who said he is “kiss­ing ev­ery frog that is com­ing through the door” in a bid to find yield, says he is not yet mov­ing into newer ar­eas, such as peer-topeer lend­ing.

‘I will kiss ev­ery frog that comes through the door in my search for in­come’

Sake, Ja­panese rice wine, is grow­ing in pop­u­lar­ity – and not just among drinkers. One en­thu­si­ast, Andy Travers, 34, from Lon­don, al­ready has sev­eral bot­tles and said the ar­rival of Bri­tish brew­ers of­fered fur­ther op­por­tu­nity for in­vestors.

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