Many commentators have attempted to call the end of the bond market rally in recent years. Returns from bonds have been more subdued this year, but over the past five years, performance from the asset class has been strong. While concerns have grown over a slowdown in quantitative easing and rising inflation, there remains speculation that bonds are due a setback.
We recently caught up with Ian Spreadbury, a renowned bond investor and manager of the Fidelity MoneyBuilder Income Fund, to discuss his latest views. In his opinion, bond prices could rise further, in line with falling yields. The manager still sees areas of value in investment grade corporate bonds, many of which still offer good yields for investors and are attractive compared with the interest rates available on UK gilts and cash deposits.
Ian Spreadbury envisages relatively low levels of global economic growth in the near term, hampered by high debt levels. Furthermore, central bank policies, including quantitative easing and ultra-low interest rates, could ultimately lead to unintended economic implications such as inflation. As such, he has maintained a relatively conservative portfolio.
Given this stance, Ian Spreadbury has generally avoided more economically-sensitive areas, such as the financials sector. Where he has invested in the banking sector, Ian Spreadbury favours highly-rated, covered bonds which are backed by a pool of assets that secure the bond if the issuer becomes insolvent and defaults on its payments. Positions are currently held in bonds issued by Barclays, Abbey National and Lloyds.
Though 20% of the portfolio is invested in financials' bonds, this is a lower proportion compared with the fund's peers. The sector has performed well over the past year and this 'underweight' position has acted as a drag on performance. However, Ian Spreadbury is happy to continue to avoid sectors more reliant on economic growth. He notes bank debt has historically been volatile and this is something he seeks to limit in the portfolio.
Ian Spreadbury favours traditionally defensive areas including utilities and consumer sectors providing essential goods and services. The fund also has a bias towards BBB-rated bonds, which sit at the lower end of the high-quality, investment grade corporate bond spectrum. Around half of the portfolio is invested in these bonds and has been beneficial to performance this year. A further 8% of the fund is allocated to cash, government bonds and supranational bonds (debt issued by international organisations such as the European Union). Ian Spreadbury believes this portion of the fund offers an element of shelter against market volatility and can also be switched quickly should more attractive opportunities arise elsewhere.
In my view, this fund could appeal to more defensive, income-seeking investors who want exposure to the corporate bond market. At present the fund is yielding 3.7% (variable and not guaranteed). Ian Spreadbury's style means the fund tends to perform similarly to the wider market when bond markets are rising, though his ability to outperform tends to shine through during difficult market conditions.
Having managed this fund since its launch in September 1995, the manager has built extensive knowledge of corporate bond markets; over this period, the fund has delivered growth of 195.7% (with income reinvested) compared with the sector average of 156.7%*. Please remember past performance is not a reliable guide to future returns, and many commentators would argue that the last 20 years have been atypical. This fund remains on the Wealth 150 list of our favourite funds across the major sectors.
|% Growth 03/11/2008 to 02/11/2009||% Growth 02/11/2009 to 01/11/2010||% Growth 01/11/2010 to 01/11/2011||% Growth 01/11/2011 to 01/11/2012||% Growth 01/11/2012 to 01/11/2013|
|Fidelity MoneyBuilder Income Fund||20.0||11.3||3.8||9.5||2.7|
|IMA £ Corporate Bond||18.1||10.2||1.0||10.3||3.5|
Past performance is not a guide to future returns. Source: Lipper IM, GBP *Figures to 01/11/2013
|Fund manager's initial charge||0.00%|
|HL saving on initial charge||0.00%|
|Net initial charge||0.00%|
|Fund manager's annual charge||0.80%|
|HL annual saving||0.00%|