‘The only game in town’ for those in search of a winning bond strategy
BOND markets have in recent years enjoyed the benefits of m many ec economic pro programmes designed to stimulatestim regions suchh as theh UK, theh eurozone and the US – including central banks stepping in to buy bonds to shore up economies struggling in the wake of the financial crisis.
These ‘money printing’ exercises have lifted the prices of bonds, but their income yields have fallen at the same time. And with talk of US interest rate rises on the horizon this will also lead to a bumpy ride for bonds.
Nevertheless, investors are likely to keep some bonds in their portfolios as they generally prove less volatile than shares over time.
So those keen to get exposure to the market without losing their shirts are increasingly turning to ‘strategic bond funds’. These have the flexibility to switch between investment-grade corporate bonds, high-yield debt and government bonds, depending on the weather in a particular market. Jason Hollands of broker Tilney Bestinvest believes ‘they are the only game in town’ for bond investors.
Hollands likes the colossal M&G Optimal Income Fund, managed by Richard Woolnough – who famously earned a stunning £17.5million bonus last year – despite not generating ‘dazzling levels of income’ recently.
But Hollands says Woolnough’s long-term record is good. ‘He was very successful at navigating major changes in the markets, including the credit crisis and the quantitative easing-induced boom of recent years,’ he says.
Deputy manager Stefan Isaacs says the aim of the fund is consistent returns – and it has certainly achieved that. ‘One of the key selling points is that bonds are less volatile than equities and fixed income can be a diversifier,’ he says.
Wrong calls on interest rates over the past year have dented returns, but the trend is steadily upwards.
Isaacs says he and Woolnough and their team see the best opportunities in investment-grade bonds – they account for half the fund’s exposure – especially those in the US, such as telecoms giants AT&T and Verizon Communications, which are just two of its vast 600 holdings.
He says: ‘There is a lot of supply in telecoms just now. The very large companies are making big bond issues and have constant refinancing needs.’