There's still life in the bond market

Many experts are keeping faith with this kind of investment, despite worries that the party is nearly over, says Emma Dunkley

It's been a 30-year party for bond investors, but there are fears the hangover is about to kick in. Even bond fund managers admit that perhaps it's time for investors to grab their coats.

But before rushing for the exit, it is worth considering whether there is still some value left in bonds.

"Clearly we've had a three-decade bull market in bonds," says Tom Stevenson at Fidelity. "However, over the last few weeks the level of nervousness has gone up over bonds, due to the perceived early ending of 'quantitative easing' in the US."

The fear is, Mr Stevenson explains, the US government will cut its buying of bonds sooner rather than later, which will see the value of bonds plummet.

"But it is probable the market has become too worried about this, because the process of stopping quantitative easing will take some time."

Problems plaguing other economies also suggest there is some life left in certain types of bonds. If things take a turn for the worse, investors could opt for fixed income as a seemingly safer alternative to the more volatile equity markets.

"The global economy is too fragile to say it's the end of all bonds," says Nick Hayes, a bond fund manager at Axa Investment Managers. "Until the issues with Europe are sorted, no one is brave enough to go full-charge into equities."

Yet, even if these actions in the US and the troubled global economy support bond prices, this might not necesssarily mean you should go and buy now.

"Is there any value left in bonds? You have to search far and wide to find it, because the patient is in its death throes," says Chris Bowie, a bond fund manager at Ignis. "There is no life in bank bonds at the moment. If you invest in the wrong bank and they go bust, you could lose a lot."

As investors have been incredibly cautious since the crisis, a vast amount of fixed income has been bought, making it now look expensive.

"This is particularly the case with what are perceived to be the safest investments such as gilts and good-quality corporate bonds," says Patrick Connolly of Chase de Vere. "Rather than protecting investors' capital, there is a real danger that these 'safe' investments could fall significantly in value."

So much so, Mr Connolly believes it is an incredibly dangerous strategy to rely on bonds to protect your money and that they could even provide you with heavy losses.

In this regard, having some of your portfolio in bonds can still offer value, although you have to remember why you're investing as well as what types of fixed income you're getting.

"Most people should aim to hold a balanced and diversified investment portfolio which would usually include a combination of equities, fixed interest, property and cash," says Mr Connolly.

"There is still life in the bond market," says Darius McDermott, managing director of Chelsea Financial Services. "The problem is that bonds are coming to the end of a 30-year bull market and our concerns are more around capital returns than their ability to pay an income."

Mr McDermott recommends the strategic bond fund sector. "We definitely think that strategic bonds are the best choice right now as the managers of these funds have the flexibility to invest across all types of bond," he says. "Some fund managers are also using the extra tools they have in their box to limit the risks out there. Our favoured funds are Jupiter Strategic Bond and Artemis Strategic Bond."

"With inflation stubborn and above the Bank of England's 2 per cent target, bond markets are largely offering sub-inflation returns for UK investors," says Rathbones' David Coombs. "I like the Ignis Absolute Return government bond fund, for example. It can still potentially get returns but the bond market doesn't necessarily have to go up."

Mr Stevenson also prefers strategic bond funds, due to the level of uncertainty over which parts of the fixed-income market will fare better or worse. He says the Legal & General Dynamic Bond Trust and the M&G Optimal Income are two of a range of relevant funds that feature on the Fidelity Select list.

Yet, as always it is worth doing your homework, because as Mr Connolly points out, there can be large differences in how funds are constructed and run, even in the strategic bond sector alone. He said in this fund category, yields range from 1.2 per cent to 7.1 per cent, while performance over the past year was -0.6 per cent at one end, but 23.2 per cent at the other.

"While funds such as Legg Mason Income Optimiser, yielding 7.1 per cent, will focus on achieving the highest possible level of income and will invest in lower-grade and international bonds to do this, others, such as Fidelity Strategic Bond, yielding 3.1 per cent, will invest far more in better-quality bonds as it aims to preserve capital," says Mr Connolly. "We recommend Fidelity Strategic Bond, Henderson Strategic Bond, Kames Strategic Bond and M&G Optimal Income in client portfolios."

Although the bond party will no doubt end at some point, there could still be time to drink a little more from the punch bowl, if done with caution. Otherwise, you will end up with a nasty hangover.

Emma Dunkley is a reporter at citywire.co.uk

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

Arts and Entertainment
Reimagined: Gwyneth Paltrow and Toni Collette in the film adaptation of Jane Austen's Emma
books
Arts and Entertainment
Jesuthasan Antonythasan as Dheepan
Cannes 2015Dheepan, film review
Sport
sport
News
Richard Blair is concerned the trenches are falling into disrepair
newsGeorge Orwell's son wants to save war site that inspired book
Arts and Entertainment
The pair in their heyday in 1967
music
Finacial products from our partners
Property search
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

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Neil Pavier: Management Accountant

    £45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

    Sheridan Maine: Commercial Accountant

    £45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

    Laura Norton: Project Accountant

    £50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

    Day In a Page

    Abuse - and the hell that came afterwards

    Abuse - and the hell that follows

    James Rhodes on the extraordinary legal battle to publish his memoir
    Why we need a 'tranquility map' of England, according to campaigners

    It's oh so quiet!

    The case for a 'tranquility map' of England
    'Timeless fashion': It may be a paradox, but the industry loves it

    'Timeless fashion'

    It may be a paradox, but the industry loves it
    If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

    Could have done with Osama bin Laden staying alive?

    Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
    New exhibition celebrates the evolution of swimwear

    Evolution of swimwear

    From bathing dresses in the twenties to modern bikinis
    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf
    From Shakespeare to Rising Damp... to Vicious

    Frances de la Tour's 50-year triumph

    'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
    'That Whitsun, I was late getting away...'

    Ian McMillan on the Whitsun Weddings

    This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
    Kathryn Williams explores the works and influences of Sylvia Plath in a new light

    Songs from the bell jar

    Kathryn Williams explores the works and influences of Sylvia Plath
    How one man's day in high heels showed him that Cannes must change its 'no flats' policy

    One man's day in high heels

    ...showed him that Cannes must change its 'flats' policy
    Is a quiet crusade to reform executive pay bearing fruit?

    Is a quiet crusade to reform executive pay bearing fruit?

    Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
    The King David Hotel gives precious work to Palestinians - unless peace talks are on

    King David Hotel: Palestinians not included

    The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
    More people moving from Australia to New Zealand than in the other direction for first time in 24 years

    End of the Aussie brain drain

    More people moving from Australia to New Zealand than in the other direction for first time in 24 years
    Meditation is touted as a cure for mental instability but can it actually be bad for you?

    Can meditation be bad for you?

    Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
    Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

    Australia's first-ever Eurovision entrant

    Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine