Corporate bonds are often seen as boring investments that lack the exciting edge offered by equities – but that doesn’t mean they should ever be overlooked. In fact, the ways in which they quietly deliver income can be a virtue for many people.
It’s a point highlighted by Chris Bowie, manager of the TwentyFour Corporate Bond fund, who believes the benefits of bonds – when investors effectively lend money to companies or governments – include not only the potential for capital gains but also the ability to help diversify broader investment portfolios.
“Bonds normally pay their interest as it falls due, with no drama nor fanfare, and thus support the income requirements of many/most investors around the globe,” he said. “It’s for this reason that the bond market is the biggest capital market in the world – it does what it says on the tin.”
Of course, this year has been a challenge for every asset class with global uncertainties and economic concerns weighing heavily on everyone’s minds. Alongside the war in Ukraine, we’ve had investor fears over rising inflation and the cost-of-living crisis.
Fund managers in the corporate bond world haven’t been immune. In fact, the average fund in the IA Sterling Corporate Bond sector is down 10.2% year-to-date*. However, there is more optimism about future prospects.
This brings us back to the TwentyFour Corporate Bond fund, which was launched in early 2015. It aims to achieve the best possible risk adjusted return by investing primarily in investment grade sterling-denominated bonds. In layman’s terms, these are loans to good quality companies. Up to 20% can be in high yield issues (companies that are deemed to be higher risk in terms of relaying those loans) or floating rate bonds (bonds that have variable interest rates).
According to Chris, the fund’s investment process starts with a current view on the world that is set at the firm’s monthly asset allocation meeting. This is then adjusted within the confines of the portfolio’s specific mandate and identifies which sectors are favoured, alongside the risk appetite.
“We then turn to our stock picking relative value database to help identify research ideas,” he explained. “This system shows the current yield of bonds at an individual, company and sector level and compares them to their actual volatility.”
Only when the combination of prospective return and historic volatility look attractive does Chris and the team dedicate time for the detailed analysis needed to ensure those companies will be the right fit for the overall portfolio.
More recently, decent opportunities have been found within a variety of sectors, particularly given that many have been under pressure this year. In fact, Chris pointed out that very attractive yields can be found in both financials and non-financials. “We favour financials as solvency and capital ratios are at all-time highs in many cases,” he said.
On a geographical basis, the UK currently represents almost 70% of the fund, followed by 17.33% in Europe, 7.86% in North America, and 2.63% in Oceania**.
Chris believes there are key reasons why investors should consider putting their faith in corporate bond funds at the moment. “The aggressive repricing of fixed income over the last nine months has taken corporate bonds to their best yield levels in years,” he explained.
In particular, he outlined the prospects for higher quality investment grade corporate bonds. Here, he thinks the entry point now is very attractive, especially when comparing to more volatile asset classes or those more exposed to the economic cycle, as we deal with the risks of recessions worldwide over the next year or so.
Of course, the million-dollar question is what happens next. Chris acknowledges that the recent environment has seen tension around both persistent inflation and the threat of global recessions just over the horizon.
“Whilst the deeper parts of the high yield market remain too risky for us (and have default concerns as we move into 2023), by contrast in investment grade we think the market has moved too far in pricing in a doomsday scenario that to us is way overblown,” he said.
While Chris accepts that there will be losers over the coming months on the back of further rate hikes and the risks of recession – even within investment grade credit – he believes there are still plenty of potential positives for investors to consider.
“Provided you stay away from deep cyclicals and companies needing immediate refinancing, we believe the yield on offer more than compensates for these risks,” he said. “In fact, that higher level of yield now available gives the greatest probability of a decent positive return over a one year holding period that we have had in literally years.”
For those investors wanting to increase their allocation to corporate bonds at more attractive levels, this fund is certainly one for consideration.
*Source: FE fundinfo, total returns in sterling, 31 December 2021 to 27 July 2022
**Source: fund factsheet, 30 June 2022
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of Juliet Schooling Latter, research director at FundCalibre, and do not constitute financial advice.