The Analyst: Artemis spots bargains amid the panic
Saturday 19 January 2008
Figures from the Investment Management Association suggest that investors have been selling their corporate bond investments. Perhaps they are disillusioned by the funds' relatively poor performance over the last year or so.
However, during that period they were fighting the headwind of rising interest rates. Conditions now look very different, with most people expecting interest-rate cuts of in the region of one percentage point during 2008.
Recently, we have seen corporate bond yields balloon out to levels last seen in the Russian default crisis – close to 1.4 per cent more than government bonds (gilts). Yields are back to where they were around six years ago.
One fund which I think is very much on top of things is the Artemis Strategic Bond Fund, managed by James Foster and Alex Ralph. Mr Foster was on top form when I met him recently. In his view, the cause of the present credit problem was an excess of leverage, resulting from interest rates being left too low for too long. Banks were particularly caught up with this, but are now being forced to bring low-quality assets back on the books because they cannot borrow commercial money.
The upshot is that their balance sheets are being strained; they can't lend money and are running out of cash. What follows this is deflation (or at least lower inflation), which has a dramatic impact on the economy as banks start to offer uncompetitive rates. This is the reason why inter-bank lending rates are so high.
The ultimate consequences of the present problems are obvious. It really doesn't matter what level interest rates fall to if the banks themselves aren't profitable and can't lend money. To see the worst of this you only have to look at Japan, which has interest rates at 0.5 per cent and where for many years banks have not been able to lend money.
However, the central banks in the UK and US are aware of this problem and will be trying to avoid the mistakes made by the Bank of Japan. I am less sure of the European Central Bank, which in my opinion spends far too much time battling inflation and is often the last to move rates down.
So where does all this leave the Artemis Strategic Bond Fund? James Foster expects more defaults in the high-yield space, and this is beginning to be priced into the market. He is still seeing some good bargains and feels he can take advantage of the current panic in financial bonds. He has topped up his positions and now holds 40 per cent of the fund in the financials, giving the fund an attractive yield (after costs) of around 6.1 per cent.
This yield will of course vary, because Mr Foster strives for the best total return and isn't obsessed with yield. I believe that this approach, while giving a fluctuating income, will in the end provide superior returns than a policy that might produce more short-term income, but at the expense of depleting long-term capital.
What I like about the fund is that it is a true managed bond fund. For many clients, it's a superb one-stop shop for your bond portfolio. Most investors don't want to be trading between gilts, high yield and investment grade. So what better than to leave it to a quality outfit like Foster and Ralph?
Mr Foster has always been professionally blunt with his views. When I saw him in 2001-02, he was extremely bearish on equities. What I found interesting this time was that he wasn't entirely negative on equities; in fact, he believes they could make good returns over the next year.
I, like Mr Foster, am not entirely bearish on equities either. Remember that this is a presidential election year in America, which is usually good news for markets. However, I am in no doubt that the overall outlook for 2008 is cloudier than we have seen in recent years. It seems a good idea to have some bond exposure, especially given the likelihood of falling interest rates during 2008.
Most important, that exposure should be via a fund where the manager has maximum flexibility.
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
sportLiverpool 5 Norwich City 1: Uruguayan striker has now scored 11 league goals against the club
filmWith more than 70 per cent of early films lost, archivists are scouring the world to preserve the precious examples that remain
NFL fans were so loud during a match that their celebrations registered as a minor earthquake
Tyre firm aimed to show how their tyres would perform in ‘unexpected’ conditions
- 1 The hardwired difference between male and female brains could explain why men are 'better at map reading'
- 2 Is this the scariest advert ever? Japanese tyre commercial comes with its own disclaimer and health warning
- 3 UK chef creates world's most expensive ready meal - a fish pie costing £314
- 4 Food poverty in UK has reached level of 'public health emergency', warn experts
- 5 I’m sure Kate Moss doesn't care about posing for Playboy. But I do
iJobs Money & Business
£Negotiable: Citifocus: The role will suit a fund product specialist, current...
£75000 - £85000 per annum + Bonus and Benefits : Harrington Starr: An award wi...
£300 - £400 per day: Harrington Starr: My client is currently looking for an e...
£300 - £400 per day: Harrington Starr: My client is currently looking for an e...
Day In a Page
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.
A six-bedroom detached period property with secluded gardens, ample parking and a double garage in Rye, £675,000.
A large split-level property with three double-bedrooms and roof terrace, close to Crouch End Broadway, £625,000.
A charming barn conversion in the picturesque Cotswold village of Ilmington with three bedrooms, a detached garage, workshop and beautifully manicured gardens £675,000.
A three-bedroom new build, ground-floor flat with two bathrooms, close to Bermondsey tube, £445,000.
A three-bedroom house in an enviable new development moments from Oxshott High Street, with secluded garden and decked area, £385,000
A two-bedroom split-level flat with stunning south-west facing roof terrace in the popular Brondesbury Conservation Area, £549,950.
A charming 16th century, three-bedroom detached house in Bidborough with picturesque garden
A top-floor one-bedroom flat in the heart of Pimlico with a terrace providing spectacular views over London, £495,000.
A six-bedroom house, with three reception rooms, 1.5 acres of land and stables, £450,000.