Mark Dampier: With gilt yields low, bond funds look like a good bet

The Analyst

Recent statistics from the Investment Management Association show that investors were net sellers of funds over the past few months. This is hardly surprising given the global economic backdrop and constant flow of poor news, particularly from the eurozone. However, not all news has been negative. In America economic statistics have been improving, and without the eurozone problems I think markets would be higher.

One thing that has struck me is that corporate bond yields have not followed gilts as they marched down to around 2 per cent. In contrast corporate bonds, or at least corporate bond funds, have yields around 4 or 5 per cent. Part of the reason is simply that the Bank of England is buying gilts, not corporate bonds, so there is a natural buyer of gilts. I also believe the market is suspicious of gilt yields at such low levels and investors have been wary because corporate bonds are priced off gilts.

As I have said many times in this column, I cannot see how interest rates are likely to rise for the foreseeable future, probably until 2014. Ben Bernanke, the chairman of the Federal Reserve, has stated that he will not raise US rates until 2013 and it could be argued that the Americans were first into recession, and so will be first to raise rates. It seems likely that with interest rates on hold for some time and with deposit rates so low, corporate bonds look a good bet for those who do not wish to take too much risk.

The Old Mutual Corporate Bond fund is managed by Christine Johnson, who joined Old Mutual in September 2010. She took over this fund when Stephen Snowdon left for Kames Capital in April 2011, and since then she has purged the fund of illiquid and "event driven" bonds (those reliant on a specific economic outcome). She was understandably keen to have a veryliquid portfolio, allowing her toadjust holdings as markets changed. Many investors believe the corporate bond market to be as liquid as gilts, but nothing could be further from the truth. It is highly illiquid, making dramatic changes difficult. Ms Johnson is aided by the size of the fund, though: at £520m it is tiny compared with many of its peers.

Ms Johnson is one of the few fund managers with a reasonable holding in gilts over the past few months. This gives her liquidity but has also boosted growth as gilts have prospered. She also holds about 30 per cent in AAA rated bonds with maturities averaging about eight years. After charges the fund yields about 4.4 per cent – double what a ten-year gilt yields. Bear in mind that in a SIPP or ISA this is also tax free.

Overall the fund is defensively positioned with no exposure toperipheral Europe. Ms Johnson is also building some US exposure. She also wants to be able to respond to any change in situation, which is why there is such a strong liquidity theme running through the fund.

While I believe gilt yields at 2 per cent offer little value, this is of no great consequence if the Bank of England, pension funds and banks continue to buy gilts. It is therefore quite likely that gilt yields will fall and stay below 2 per cent in the near future. Consequently, I think there is every chance that corporate bond spreads could tighten against gilts, giving some capital increase in bond values as well as locking in yields above 4 per cent. I believe this is well worth considering for more risk-averse investors.

Mark Dampier is head of research at Hargreaves Lansdown, the 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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
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

    Ashdown Group: Marketing Manager - B2B, Corporate - City, London

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Neil Pavier: Commercial Analyst

    £50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

    Loren Hughes: Financial Accountant

    £45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

    Sheridan Maine: Finance Analyst

    Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

    Day In a Page

    General Election 2015: The masterminds behind the scenes

    The masterminds behind the election

    How do you get your party leader to embrace a message and then stick to it? By employing these people
    Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

    Machine Gun America

    The amusement park where teenagers go to shoot a huge range of automatic weapons
    The ethics of pet food: Why are we are so selective in how we show animals our love?

    The ethics of pet food

    Why are we are so selective in how we show animals our love?
    How Tansy Davies turned 9/11 into her opera 'Between Worlds'

    How a composer turned 9/11 into her opera 'Between Worlds'

    Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece
    11 best bedside tables

    11 best bedside tables

    It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
    Italy vs England player ratings: Did Andros Townsend's goal see him beat Harry Kane and Wayne Rooney to top marks?

    Italy vs England player ratings

    Did Townsend's goal see him beat Kane and Rooney to top marks?
    Danny Higginbotham: An underdog's tale of making the most of it

    An underdog's tale of making the most of it

    Danny Higginbotham on being let go by Manchester United, annoying Gordon Strachan, utilising his talents to the full at Stoke and plunging into the world of analysis
    Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police

    Steve Bunce: Inside Boxing

    Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police
    No postcode? No vote

    Floating voters

    How living on a houseboat meant I didn't officially 'exist'
    Louis Theroux's affable Englishman routine begins to wear thin

    By Reason of Insanity

    Louis Theroux's affable Englishman routine begins to wear thin
    Power dressing is back – but no shoulderpads!

    Power dressing is back

    But banish all thoughts of Eighties shoulderpads
    Spanish stone-age cave paintings 'under threat' after being re-opened to the public

    Spanish stone-age cave paintings in Altamira 'under threat'

    Caves were re-opened to the public
    'I was the bookies’ favourite to be first to leave the Cabinet'

    Vince Cable interview

    'I was the bookies’ favourite to be first to leave the Cabinet'
    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat