Mark Dampier: They say the only way is down but some bonds are yielding to no one
Saturday 25 May 2013
Forecasters have called the top of the bond market on numerous occasions over the past two years, but gilts have resolutely not behaved in the way in which many bond fund managers expected. Today, 10-year gilts are yielding 1.9 per cent. Yields may have touched a low of 1.4 per cent last summer, but in reality they have settled in a tight trading range.
Those who have shorted gilts in anticipation that prices will eventually fall have thus far suffered the consequences. Betting against central banks is seldom a good policy; as liquidity has continued to be pumped into the markets via quantitative easing (QE), gilt prices have remained stubbornly high.
By historic standards, bonds are expensive. It is not inconceivable that prices will remain elevated for some time yet. We are living in a very different world, for the time being at least, where a continuation of ultra-low interest rates is forcing investors to hunt for yield in all sorts of asset classes. An extension of the Bank of England’s Funding for Lending Scheme means banks don’t require our deposits, driving interest rates lower – with every likelihood they could fall further. Against this backdrop, it is not surprising that gilts have not seen a dramatic yield rise.
Aside from gilts, all areas of fixed interest are in demand. This includes more risky high-yield bonds, which have been touching on levels not seen historically. This does not mean value can no longer be unearthed in this area of the market, but care does need to be taken. It is for this reason that I prefer to invest with an experienced bond fund manager, who can make the decisions for me.
Eric Holt, manager of the Royal London Sterling Extra Yield Bond Fund, acknowledges the dangers but is still finding plenty of opportunity. While Mr Holt views the gilt market as expensive, he does not expect its direction to change any time soon, believing there is potential for further QE in the future. In an environment of low growth, low interest rates and relatively low inflation, this is exactly the type of environment in which bonds could do well.
At present, Mr Holt’s fund has 42 per cent invested in high-yield bonds, with a further 35 per cent in unrated bonds. Unrated bonds are issued by companies that haven’t paid an agency for a credit rating; Mr Holt prefers to do his own research into a company’s strength rather than relying on ratings agencies. Many of those held in the portfolio are collateralised bonds, secured against the assets of the company issuing them. Being unrated, these bonds also tend to offer a better rate of interest.
The Royal London Sterling Extra Yield Bond Fund currently offers a running yield of 6.15 per cent, which is tax free in an individual savings account or self-invested personal pension (Sipp), and dividends are paid quarterly. Investors must bear in mind that this fund should not be considered low risk simply because it has the word “bond” in it – a common misconception. Indeed, the fund was severely hit, at least in terms of its capital value, during the credit crisis in 2008. Mr Holt, however, held his nerve and the fund has since doubled in value.
He has recently purchased seven- year mortgage debentures issued by Alpha Plus Holdings, yielding an attractive 5.75 per cent. The bond is secured on property, in this case London private schools. Mr Holt has also bought bonds issued by Annington Finance, which are secured on Ministry of Defence accommodation. Mr Holt recognises that liquidity for these bonds is low, but at a yield of 10 per cent, he feels he is being appropriately compensated for the risk taken.
The best bond returns are likely to be behind us, but Mr Holt is confident he can deliver attractive total returns from a combination of both income and capital growth. A large part of my own Sipp is invested in this fund, enjoying the benefits of tax-free income. In my opinion, interest rates are unlikely to rise any time soon. As the search for yield continues to gather momentum, I am happy to hold this fund until the facts change.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
20 December 2012 09:07 AM
20 December 2012 09:10 AM
Fee-free, expert mortgage advice:
- Find the right mortgage for you
- Latest best-buy deals
- Mortgage calculators
Questions of Cash: What are my rights if my leak is caused by neighbours’ roofs?
Pension mortgages: 'The advice I was given was wrong and now I face losing my home'
Mark Dampier: Maybe boom, maybe bust, but we'll probably just muddle along
The 10 Best money-saving sites
How to start your own internet business
- 1 The political parties aren't all the same – which means 2015 will be a 'big-choice' election
- 2 President of Argentina adopts Jewish godson to 'stop him turning into a werewolf'
- 3 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
- 4 The 'Black Museum': After 150 years, public set to see exhibits from police’s grisly crime museum
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
Immigrants make UK racist, says Ukip councillor Trevor Shonk
Nigel Farage: Ukip leader named 'Briton of the year' by The Times
BBC director Danny Cohen: Rising UK antisemitism makes me feel more uncomfortable than ever
iJobs Money & Business
Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...
Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...
Not specified: Selby Jennings: SVP Model Validation This top tiered investment...
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
Day In a Page
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
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