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
- 1 Games of Thrones actor Lena Headey makes emotional promise to her unborn daughter
- 2 Isis burns woman alive for refusing to engage in 'extreme' sex act, UN says
- 3 Puerto Rico, island of lost dreams: People are leaving the debt-hit territory in droves as near neighbour Cuba's star rises
- 4 Female Muay Thai champion hustles coaches to give them a beating
- 5 Picture of couple posing with beached dolphin 'that later died' causes outrage
As a white man, I'm surprised more women aren't tweeting the hashtag #KillAllWhiteMen
Scotland may have to leave the EU even if it votes to stay in, David Cameron confirms
Report finds that Britain's wages are the most unequal in Europe
The day that Britain resigned as a global power
Almost a third of school pupils believe 'Muslims are taking over our country', study claims
SNP fury as HS2 finds 'no business case' for taking fast train service to Scotland
iJobs Money & Business
£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...
£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...
£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...
£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...
Day In a Page
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof