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
Saturday 15 June 2013
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; request a free guide on NISAs from Hargreaves Lansdown
New UK station Russia Today gives a very bizarre view of Britain
By performing as African Americans or Indians, white people get to play act a kind of 'imaginary liberation', writes Michael Mark Cohen
New essay by JK Rowling went live on Pottermore site this morning
Top Gear presenter is no stranger to foot-in-mouth controversy
10 tips for taking out a personal loan
Santander's new current account is not quite as easy as 1, 2, 3
Weekly Money: Round-up of the personal finance stories you may have missed 13-17 October
Bank-beating exchange rates on your international payments
Simon Read: Payday loans that are marketed at kids? Why not? They're already brainwashed into wanting products
- 1 Canadian actor punched in face after 'Islamophobia' experiment goes wrong in wake of Ottawa shooting
- 2 Topshop at centre of row over body image as 'shocking' skinny mannequin photo goes viral
- 3 Top Gear presenter Jeremy Clarkson criticised for beer tweet
- 4 The bubble bursts for Sodastream
- 5 If you think Russell Brand’s new book is confused, you should read what his critics have to say about it
Pope Francis declares evolution and Big Bang theory are real and God is not 'a magician with a magic wand'
Huge surge in Ukip support after EU funding row, according to new poll
Ukip ‘exploiting grooming scandal’ to secure party’s first police chief
Nigel Farage: 'There’s nothing wrong with white people blacking up'
Maureen Lipman says 'she can't vote Labour while Ed Miliband is leader'
Muslims, immigration and teenage pregnancy: British people are ignorant about almost everything
iJobs Money & Business
£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...
£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...
Day In a Page
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
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
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
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000