Mark Dampier: High-quality bonds minimise risk

The Analyst

Stock markets have had a very strong bounce since reaching a low point in early March. The debate is whether this is the start of a new bull market, or just a so-called "bear market rally" and further falls are around the corner. The jury remains out.

My personal view is that, although I am positive for the long term, I'm not quite convinced that we can have a real bull market just because things have started getting worse more slowly. Only time will tell, but it does seem as we enter the summer that many stock markets are ripe for a short-term dip.

Consequently it is interesting to see that Legg Mason is launching (on 2 June) a global blue chip bond fund rather than an equity fund. It will be managed be Western Asset Management, one of their subsidiaries and a specialist bond house. The obvious question to ask is: why now?

Well, firstly, valuations look very attractive with credit spreads close to their all-time wide levels. In English, that means the difference between corporate bond yields and Government bond yields is the biggest it has ever been. The spread between them tends to widen at times of economic stress and narrow when things settle down.

At the moment the spreads seem to imply that more than 30 per cent of investment grade bonds will default over a five year period. I believe this is unrealistic. To give this some kind of perspective, even in the great depression defaults did not reach 5 per cent over any five year period. So this suggests bonds are being valued far too cheaply and there are excellent bargains out there.

Legg Mason also cites stronger balance sheets in the US as companies put things in order for a tough period ahead. Supply and demand have both also picked up this year, and while I expect demand to remain strong, supply will probably tail off as companies stop issuing debt to buy back their stock. Additionally, there has been a trend of pension funds in the US moving more money into corporate bonds. This should be a positive environment for bond prices.

So where does the new Global Blue Chip Bond Fund invest? Well the name probably gives it away, but it focuses on the high quality investment grade corporate bonds from across world markets. The managers will seek to minimise risk where possible and so will have a maximum weighting in the finance, insurance and property sectors of only 10 per cent. This is the area that has caused bond investors the most grief over the last year or two.

It will also have a requirement to invest only in bonds with a relatively high credit rating (at least A-) – in essence the fund is looking to produce a yield of a little over 5 per cent but with minimal risk. So in practice this could be seen as the first stepping stone for investors who want to move away from Government bonds towards corporate bonds, moving to the next stage in terms of risk. The biggest holdings at launch are to include bonds from firms such as Hewlett Packard, AT&T and AstraZeneca.

Western Asset Management may not be well known but they manage a vast amount of money in bonds across the world and have one of the largest credit analyst teams around with an average experience of over 16 years.

Bonds funds should not be seen as a replacement for cash, but if you already have enough on deposit and are looking for ways to boost your return then they are worth considering. Although a cautious fund such as this should have relatively low volatility it should be remembered that it can still fluctuate in value – that's why it is not a substitute for cash.

Although stock markets have rallied, bonds have only rebounded a little way. This means corporate bonds still have ample room for long term growth.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information 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

News
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Sport
sportSo, how closely were you paying attention during 2014?
Arts and Entertainment
Dennis speaks to his French teacher
tvThe Boy in the Dress, TV review
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film
PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

    Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    Day In a Page

    Aren’t you glad you didn’t say that? The worst wince-and-look-away quotes of the year

    Aren’t you glad you didn’t say that?

    The worst wince-and-look-away quotes of the year
    Hollande's vanity project is on a high-speed track to the middle of nowhere

    Vanity project on a high-speed track to nowhere

    France’s TGV network has become mired in controversy
    Sports Quiz of the Year

    Sports Quiz of the Year

    So, how closely were you paying attention during 2014?
    Alexander Armstrong on insulting Mary Berry, his love of 'Bargain Hunt', and life as a llama farmer

    Alexander Armstrong on insulting Mary Berry and his love of 'Bargain Hunt'

    From Armstrong and Miller to Pointless
    Sanchez helps Gunners hold on after Giroud's moment of madness

    Sanchez helps Gunners hold on

    Olivier Giroud's moment of madness nearly costs them
    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect