Is now the time to invest in bond funds?

Joseph Hill – demand has fuelled government bond markets

As stock markets tumbled across the globe in response to the coronavirus pandemic, the story in bond markets has been somewhat different.

Other central banks around the world have also been taking similar action, and it’s possible that there’ll be more to come. The interventions we’ve already seen have been far greater than those seen during 2008’s financial crisis. This arguably backstops the system to an extent we have never seen before.

The strong demand for bonds has also been matched by an increasing supply. Companies have been issuing new bonds at a rapid pace to shore up their finances and future-proof their businesses. In the US, March saw a record $260 billion of new investment grade bonds supplied to the market.

Mark Dampier, Research Director - are bonds good value now?

Supposedly bonds have been in a bubble for a decade. In fact they have been in a bull market since I started investing, more than 35 years ago. In 1981, the ten-year gilt yield was 16%, compared to 0.31% on 16 April 2020. So it’s hard to call bonds an out-and-out bargain today when looking at the yield.

But the environment has changed dramatically since the financial crisis of 2008, let alone since the beginning of the 1980s. And so has the bond market.

The corporate bond market, where investors are paid interest to lend money to companies, has grown considerably. Corporate bonds are considered higher risk than government bonds, but for that extra risk, investors usually get a higher interest rate.

The yields available on corporate bonds have increased recently, and prices have fallen, because of the near closing of the global economy in a bid to control the impact of Covid19. This has created some opportunities for professional investors.

As Joseph said above, there has been a huge policy response from both governments and central banks. The latter have come in to buy corporate bonds, which has helped liquidity. Governments are effectively acting as a backstop to the financial and economic system, helping businesses and workers stay afloat. This is so that the economy can more easily restart when there is some control over the virus.

This policy response has seen a partial recovery in corporate bonds. But after speaking to a number of bond fund managers, we think there is further to go. This means opportunity for investors but it could fall further.

A considerable amount of bad news is already factored into prices. In the UK stock market investors have seen widespread dividend cuts, so corporate bonds with their fixed income could be a good way to diversify your income stream.

Interest rates have been cut to 0.1% in the UK, so cash deposits will struggle to offer anything close to inflation. Interest rates will be staying lower for even longer to allow and help demand return when the economies start to reopen – although you should always hold a cash buffer for emergencies.

Companies will be very careful and conservative over the next few years in terms of their balance sheets. I think this leaves corporate bonds in a good place for some time.

Joseph Hill – three bond funds to take advantage of market opportunities

Financial markets are moving fast at the moment, driven by newsflow about the pandemic and policymakers’ response to it. Bond markets are no exception.

In this environment, we favour bond funds with the flexibility to move quickly between different areas of the bond markets to take advantage of the opportunities that arise. Below we look at three funds with experienced managers who we think can deliver good long-term returns.

We wrote the reviews below for your interest – they aren’t personal advice or a guide on how to invest. You should choose investments based on your own objectives and attitude to risk.

Unlike the security offered by cash, investment values can fall as well as rise, so there’s no guarantee you’ll make a profit – you could get back less than you put in. If you’re not sure whether an investment is suitable, please ask us for advice.

Jupiter Strategic Bond

We think Ariel Bezalel, manager of the Jupiter Strategic Bond fund could be well-placed to take advantage of current opportunities.

Bezalel has decades of experience and we think he’s a talented bond picker. He has the freedom to express his views on the economy within the fund by investing across different areas of the bond market, from traditional government and corporate bonds to higher-risk high-yield bonds.

This flexibility gives him the opportunity to achieve the highest returns possible for investors through a combination of income and growth.

Bezalel takes a view on matters like global monetary policy, the outlook for inflation, interest rates and economic growth. These views will then influence how he invests the fund and the mix of bonds that best suits those market conditions.

Bezalel thinks he'll be able to reward investors by taking more risk when the outlook's good and by playing it safe when it's not. This also drives the level of interest rate sensitivity he wants in the fund. When he expects rates to fall he's more likely to invest in bonds that have repayment dates that are further away. They'll usually see a bigger increase in value than shorter dated bonds.

He's able to invest around the world providing at least 80% of the fund is invested in bonds that are bought and sold in pounds. He can also use derivatives which can increase risk.

Heading into 2020, before the coronavirus crisis emerged, Bezalel had been sceptical about the prospects for global economic growth. He thought low demand and stubbornly low inflation could be headwinds. As a result his defensive positioning has helped the fund to protect its value in recent months.

This bond fund invests in emerging markets, which are higher risk than developed markets. For more information, please refer to the Key Investor Information.

Five year performance

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2020.

Find out more about Jupiter Strategic Bond inc. charges

Jupiter Strategic Bond Key investor information

M&G Global Macro Bond

Jim Leaviss and the team at M&G are some of the most experienced investors in the Global Bond sector.

He starts with the bigger picture, forming a view on economic growth, interest rates and inflation. This helps him to then determine how much to invest in different areas of the bond market.

Leaviss is likely to invest more in corporate and emerging market bonds when he is positive, and more in government bonds when his outlook is cautious. He can also use derivatives to enhance returns, though this is a higher risk approach.

He positioned M&G Global Macro Bond defensively running up to the coronavirus crisis, adding government bond exposure and positioning the fund to take advantage of potential interest rate falls.

This helped the fund to hold up relatively well recently. Leaviss has used lower prices as an opportunity to increase exposure to corporate bonds, mostly in the ‘investment grade’ space. ‘Investment grade’ bonds are those issued by companies thought to be more financially stable and therefore are lower risk.

Historically, the fund's currency exposure has also had a big impact on returns, with performance boosted by exposure to the US dollar when it is strong against sterling. We expect the fund's currency exposure to continue to be a key influence on performance in future.

Please note, this fund takes its charges from capital, and distributes any income, which can reduce capital growth potential.

Five year performance

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2020.

Find out more about M&G Global Macro Bond inc. charges

M&G Global Macro Bond Key investor information

Invesco Tactical Bond

Invesco Tactical Bond is managed by the vastly experienced Paul Causer and Paul Read who lead the fixed interest team at Invesco. They are a pair we rate highly.

They invest wherever they see the best opportunities. This could mean investing in higher-risk areas or have exposure to higher-risk high yield bonds that pay an attractive income. Or it could mean being defensive when opportunities are few and far between by holding less risky bonds and cash.

The managers combine their analysis of the economy and individual bonds to shape the portfolio. We think they're very skilled at this and the fund’s performance ultimately hinges on their ability to interpret the bigger economic picture and invest accordingly.

The managers have had a cautious outlook for some time and as a result the fund has been positioned defensively. The fund has therefore lagged behind the market over the last few years, but more recently it has held up well and provided a positive return in what has been a volatile last year for markets. We expect the fund to lag a rising market but think it has the potential to continue to hold up better when the market is falling.

The fund has the flexibility to invest in derivatives which if used add risk.

Five year performance

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2020.

Find out more about Invesco Tactical Bond inc. charges

Invesco Tactical Bond Key investor information

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