The Analyst: Corporate bonds aren't always boring
Saturday 10 May 2008
In a number of articles this year, I have highlighted the attractions of corporate bonds. I am pleased to report that in the last few weeks these have been moving up quite strongly. For example, the Invesco Perpetual Monthly Income Plus Fund has risen almost 4 per cent (with income reinvested) since I featured it in February. I remain positive on the prospects for these funds over the next few years.
This week I will examine a new bond fund from Legg Mason, their Global Multi-Strategy Fund. Although the fund will carry the Legg Mason brand, the actual management will be done by its Western Asset subsidiary. They are the third- largest fixed income investment house in the world, with more than $600bn (£300bn) of assets under management. They are true bond specialists.
The lead managers will be Ian Edmonds, whose background is in European high yield bonds, and Mike Zelouf whose specialises in emerging market bonds. These individuals are based in London and have the support of 30 other professionals in London and 172 globally. This is very much a team-based approach and it's worth noting that Western Asset has not lost a senior manager in the last 15 years.
The fund has an emphasis on flexibility and on holding only the team's best ideas. Its goal is to provide the best total returns irrespective of yield, so those investing for income should note that the yield may at times be relatively low if the manager believes that capital appreciation is a surer path to profit.
While this approach will not suit everyone's needs, I believe it is generally a better philosophy than trying to seek out the highest possible yield all the time. Constantly chasing a high income can lead to significant capital falls, which over time will erode your income, too.
The investment process starts with a 13-strong strategy group that meets twice a week to determine how all of Western Asset's funds should be positioned in terms of different types of bonds, their maturity and geographic and sector allocations. As a result of this, the weightings between different assets will change over time as market conditions ebb and flow.
This active approach allows the managers to seek opportunities in whichever areas they expect to deliver the best potential returns. Western Asset has been running a similar fund offshore since 1996 and it has established a strong track record.
It is expected that the fund will be aggressively positioned at launch; the managers see plenty of opportunities following the amount of forced-selling that has been going on in the market. They are expecting a strong recovery as the bond market overcomes these technical issues. Such bullishness means that the fund will have something in the region of 32 per cent exposure to high yield, 18 per cent in investment grade, about 8 per cent in emerging market corporate bonds and 8 per cent in emerging market government bonds.
In addition to this, there will initially be some small exposure to Asian currencies, while some 20 per cent will be invested in US agency mortgage-backed securities such as Freddy Mac and Fannie Mae where spreads have gone from around 0.4 per cent to around 2.6 per cent. Currency risk will be largely hedged back into Sterling, with at most 20 per cent of the portfolio exposed to currency movements. In addition, the fund will have a large number of holdings in order to diversify away some of the risk.
For example, the portfolio of the existing offshore fund contains approximately 600 holdings. It pays a monthly income and will have a yield in the region of 6-8 per cent, but as I said earlier this could vary quite a bit over the years.
The managers believe that bond defaults will rise as the global economy slows, but that the level of defaults will be nothing like what current bond prices currently suggest. Basically, Western Asset are telling me what most bond managers have been saying for the last two or three months; that there is tremendous value in bond markets.
This new fund offers the opportunity to take advantage of this phenomenon on a global scale and with a group whose only raison d'être is investing in bonds. So if you are one of those who think that bonds are boring maybe you should take a closer look at this fund, which should be able to select from the best opportunities from across the world.
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
10 tips for taking out a personal loan
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Donald MacInnes: My wasted hours in the retail deserts of Dixons-Carphone
Pension firms must ask consumers more questions, says City Watchdog
How to start your own internet business
- 1 The BBC has just done more to eradicate ‘terrorism’ than all our wars since 9/11
- 2 Dog thinks owner is drowning in lake, dives in and tries to pull him out
- 3 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 4 Chilling drone footage captures Auschwitz ahead of 70th anniversary of liberation
- 5 Phil Neville backtracks on Tomas Rosicky 'I'd smash him' comments from Match of the Day 2
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
Islamic history is full of free thinkers - but recent attempts to suppress critical thought are verging on the absurd
Leaked documents show Ukip leaders approve NHS privatisation once it becomes more 'acceptable to the electorate'
iJobs Money & Business
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
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