Peppa Pig helps to spice up ‘boring’ bond market
AZHAR Hussain has spent the past 13 years carving out a career as a high yield bond specialist, first at Gulf International Bank and then at Insight Investment Management. He is convinced that corporate bonds have great merit for investors, especially in a low interest rate environment where share prices are volatile.
For the past four years, he has been plying his trade at Royal London Asset Management, running two funds with fellow manager Stephen Tapley – Global High Yield Bond and Short Duration Global High Yield Bond.
Launched in early 2013, both funds have delivered satisfactory overall returns – 17 per cent and 15 per cent respectively. More impressively, their performance has been steady as a rock – with few blips along the way.
Hussain is delighted with the way things have gone. He says: ‘The bonds we are investing in possess little of the price volatility that equities have. Overall, it’s a really boring asset class, which is its greatest attraction.
‘Investors are currently getting an income of 4.5 per cent a year on Global High Yield, slightly higher on Short Duration, at a time when the base rate is standing at 0.5 per cent. It’s an appealing proposition.’
The managers invest in bonds issued by companies – so-called corporate bonds – across the globe. They all have a credit rating of less than BBB–, which means they are deemed ‘high yield’ or rather less flatteringly ‘junk’.
This is in marked contrast to the higher rated AAA bonds issued typically by governments, which are deemed ‘investment grade’ and pay a lower income because of their greater security.
Despite the ‘junk’ tag, Hussain believes the risks to investors are low. Since he launched the two funds, only one bond they held – issued by failed retailer Phones 4U – has turned bad. Typical default rates in the high yield market run at between 5 and 6 per cent a year.
‘You’re looking at a universe of more than 3,600 corporate bonds that contains a host of household names,’ says Hussain. ‘In the UK, which accounts for just 5 per cent of the market, you are talking about the likes of Debenhams, Pizza Express and Wagamama.’
Crucial to running a successful high yield bond fund is ensuring the firms are able to meet their income obligations and ultimately repay bondholders their capital.
Hussain, a chartered accountant by training, says this involves more than number crunching. He explains: ‘Key is getting to know and trust company management. It’s about evaluating their business plans. Ultimately, we are looking to buy bonds issued by robust, solid companies whose management we trust.’
Short Duration Global High Yield Bond is the bigger of the two funds. It tends to buy bonds close to their maturity date, where there is a near certainty they will be redeemed in full.
By contrast, Global High Yield Bond is happy to buy new bonds. Most of the 99 bonds it holds – 74 per cent – still have five years or longer to run.
One of the most recent new issues it bought was a seven-year bond that paid a ‘coupon’ – interest – of 6.875 per cent. It was launched by Canadian TV firm Entertainment One, which owns the Peppa Pig brand.
Recent speculation that the firm is being courted by ITV has led to a jump in the price of the bond. Hussain has held firm, preferring the income it generates over crystallising a short-term gain.