The Analyst: Corporate bonds aren't always boring

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

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

A survey carried out by Sainsbury's Finance found 20% of new university students have never washed their own clothes, while 14% cannot even boil an egg
science...and the results are not as pointless as that sounds
politicsIs David Cameron trying to prove he's down with the kids?
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Client Services Manager - Relationship Management - London

    £30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

    Recruitment Genius: Credit Controller / Customer Service

    £18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

    Guru Careers: In-House / Internal Recruiter

    £25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

    Recruitment Genius: Tax Assistant

    Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

    Day In a Page

    Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

    Auschwitz liberation 70th anniversary

    Woman sent to three Nazi death camps describes surviving gas chamber
    DSK, Dodo the Pimp, and the Carlton Hotel

    The inside track on France's trial of the year

    Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
    As provocative now as they ever were

    Sarah Kane season

    Why her plays are as provocative now as when they were written
    Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

    Murder of Japanese hostage has grim echoes of another killing

    Japanese mood was against what was seen as irresponsible trips to a vicious war zone
    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore
    'I'm gay, and plan to fight military homophobia'

    'I'm gay, and plan to fight military homophobia'

    Army general planning to come out
    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea