Corporate Bond Funds Hit Hard by Credit Woes
We look at the laggards and the stalwarts among sterling corporate bond funds.
We noted a couple weeks back that Stephen Snowden's Old Mutual Corporate Bond is the worst performer in the group on a year to date basis, but he's not the only straggler. Other funds with large losses include: AXA Sterling Corporate Bond (now run by Theo Zemek following Neil Sutherland's departure, and down 23.3% in 2008), New Star Sterling Bond (down 26.4%), Ignis Corporate Bond (down 23.2%), Legg Mason Sterling Corporate Bond Plus (down 21.7%), and Gartmore Corporate Bond (down 22.1%).
Such losses are painful, particularly given the conservative role most investors expect bond funds to play in their portfolios, but there could be reason to grimace and bear it. First, the widening out of spreads in the corporate universe is implying a level of defaults that many market players believe are high. It is in part an exaggerated reaction to the systematic under-pricing of risk for many years in the bull market. This underpricing stemmed in turn from an oversupply of easy money in search of yield meeting up with what appears to have been misjudgements of credit quality. There are also structural factors at work, with liquidations at hedge funds exacerbating selling pressure.
Such events can often give rise to opportunity for patient investor. As tempting as it might be to go with funds that have higher quality biases, doing so could leave you missing a chance to pick up good value. Among the above funds, we think Snowden has the ability to deliver good returns for investors over time, and his portfolio is positioned to benefit from any rationalisation of spreads. For a more moderate approach, we think highly of what Fidelity's Ian Spreadury has achieved at Fidelity Moneybuilder Income. A key advantage is his ability to leverage the team of nearly 30 credit analysts employed by Fidelity. In a market like this, where much hinges on avoiding the dreck that may go under and finding those credits that are most undervalued, that resource should be a key advantage. Spreadbury has guided the fund to solid long-term returns with a sensible approach that allows him to be opportunistic, but without the more extreme risk taken by some of his rivals.
For those who are seeking fund that has taken even less risk (at least from a historical volatility view) in addition to Richard Woolnough's M&G Corporate Bond, John Anderson's Rensburg Corporate Bond merits consideration. It has held up reasonably well in the latest meltdown, with a loss of 0.8% through 5 December, far better than the sector norm, and Anderson was correctly cautious about lower-rated fare coming into the meltdown. He doesn’t have the analyst backing of Spreadbury, but he's shown a knack or positioning the fund well to limit losses whilst delivering competitive returns.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
