Mark Dampier: Cautious Snowden is set for a rapid turnaround
Saturday 17 December 2011
Last week Stephen Snowden visited our office to discuss the Kames Investment Grade Bond Fund, which he has been running for six months since joining from Old Mutual. Over this time it has not been easy being a bond manager. Those that haven't had most of their assets in gilts have found it tough. However, the fund isn't allowed to invest entirely in gilts as it is predominantly a "credit" fund. This means it has to buy corporate rather than government bonds.
The eurozone crisis has brought sovereign bonds into sharp focus in terms of whether they are really safe. Already we have seen Greece, Portugal and Ireland unable to raise money from the open market at anything other than punitive levels, and there is now a danger Spain and Italy may join them. Yields in the latter two countries have been over 6 per cent, and in the case of Italy they hit 7 per cent, making borrowing prohibitively expensive. If they can't go to the market to raise funds they must go elsewhere and this may include the IMF. The danger is Europe runs out of firepower. The Germans are resolutely against any form of quantitative easing, but the longer this goes on the more likely they will have to give in and effectively print money to continue buying up distressed sovereign bonds.
Unfortunately it looks like the Germans may take this to the brink. If they give in too early, it will seem like profligate countries have been let off the hook, making them less likely to take austerity budgets seriously. This opens up the possibility of the markets taking control and forcing the politicians' hands, which means equity and corporate bond markets may well fall further as investors shun risk assets.
For this reason Mr Snowden has been somewhat defensive, and he has no exposure to the southern Mediterranean banks. He has been watching business confidence indicators turn down as companies delay making investment until they are sure of what is going to happen. It is this paralysis that is likely to cause a recession in Europe and, in turn, the UK. Despite valuations in credit markets looking relatively appealing he believes spreads (the difference in yield between what you can obtain on a government bond and an equivalent corporate bond) could increase further. In other words until he sees further falls in corporate bond markets he refuses to become more bullish.
Yet he has to be careful about being too defensive. He warns that liquidity in the corporate bond market is poor again, in other words it is difficult to buy or sell large positions. So while things might get worse before they get better, when the market turns he believes it will happen quickly and there will be little chance for any bond managers who are sitting in gilts and cash to get on board. This is precisely what happened in 2008 as more aggressive funds sharply rebounded, quickly overtaking those more defensively positioned. He is therefore sticking to his mix of bonds of global companies such as BP, Johnson & Johnson and Petrobras.
So while Mr Snowden is rather negative in the short term, he is sure at some point next year there will be a quick and significant turn-around. He is not alone in feeling that while valuations are cheap they may get cheaper.
Although the fund has a decent yield of over 4 per cent it may be best for investors to phase their way in, rather than buying a big holding in one go. With short-term deposit rates likely to stay very low for the foreseeable future, corporate bonds do look attractive, but I believe it is worth building exposure slowly.
Mark Dampier is head of research at Hargreaves Lansdown, asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Board creates magnetic field to achieve lift
Follow the latest events from this Champions League fixture
Company reveals $542m investment in start-up building 'a rocket ship for the mind"
Like Madonna, Sister Cristina Scuccia's video is also set in Venice
Singer says the track was 'force-fed down people's throats'
techThe original free dating app will remain the same, developers say
- 1 Jack the Ripper: Scientist who claims to have identified notorious killer has 'made serious DNA error'
- 2 Banksy arrest hoax: Internet duped by fake online report claiming artist's identity has been revealed
- 3 Drink alcohol and eat meat to improve male fertility - but cut down on coffee, studies suggest
- 4 Former East 17 frontman Brian Harvey turns up at Downing Street and 'demands to speak to Prime Minister'
- 5 The inventor of the Facebook 'like' button says he never made a 'dislike' button because he feared the 'unfortunate consequences'
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Lord Freud: Tory welfare minister apologises after saying disabled people are 'not worth’ the minimum wage
Lord Freud hangs on as MPs of all parties 'call for his head' over disability comments
iJobs Money & Business
£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...
£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...
£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...
£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village