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Bond funds caught out by bank crisis
Funds such as the £5 billion Invesco Corporate Bond fund have been hit by their hefty exposure to the troubled banking sector.
Read said he was 'a bit surprised’ and ‘slightly puzzled’ about the report from S&P. ‘We’ve run concentrated portfolios over the years, we’ve also shown clearly an ability to manage liquidity in portfolios in 2008 and 2009 when we were concerned about the global meltdown and no liquidity in the markets.
'We had huge amounts of short-term liquidity available to us should we need it, and again in this market, although we do have concentrated positions in financials, we still have very significant amounts of liquidity across the board.’
The argument against bank bonds
Read's confidence in bank bonds is ironic as the equity team at Invesco Perpetual, led by Neil Woodford, has become well known for its negative views on bank shares, believing that bad debts will dog the sector for a long time. This is not a contradiction as bonds can do well when shares are falling. Nevertheless, it must make for an interesting debate at investment meetings.
However, other bond fund managers disagree with Read about the prospects for bank bonds.
Ben Lord, bond portfolio manager at M&G, says the investment group has reduced exposure to financials in its bond funds to around 10%. As a result, its £5 billion Corporate Bond, managed by Richard Woolnough and also in Citywire Selection, has maintained its performance during the turbulent summer.
Lord is concerned that bank bond holders will suffer losses as a result of increasing banking regulation and any eurozone settlement arising from the recent Merkel-Sarkozy talks. He said, ‘we’re not convinced we will get our coupons or even all our principal back'.
Paul Lowman, chief investment officer at Investment Quorum, a financial planning firm in the City of London, said: ‘We have fairly little exposure to financials. The banking sector is still a highly toxic area to be invested in. We see value in the banking sector but the risks are too great to add a banking allocation to our portfolio.
‘The majority of funds we own we can get an exit point, we’re not keen on funds where that’s a problem. When a fund is downgraded it does start alarm bells ringing.’
Our Citywire Selection team has identified 17 bond funds they recommend. These range from funds investing in UK government bonds such as Allianz Pimco Gilt Yield to those like Kames High Yield Bond that invest in the bonds of companies whose credit rating is less than perfect. Others like Investec Global Bond invest in bonds across the world.
Four of the main funds in the bank bond debate are also Citywire Selection recommendations. From the 'no' corner M&G Corporate Bond and Fidelity Moneybuilder sit alongside Invesco Perpetual Corporate Bond and Schroder Corporate Bond from the 'yes' corner.
These last two are obviously under some pressure at the moment. Whether you decide to continue to back them or not is a personal decision. We continue to believe they are good funds, but this summer's events have highlighted that they take big bets on sectors, which will not be to everyone's liking.
More about this:
Look up the funds
- Invesco Perpetual Corporate Bond Acc
- Schroder Corporate Bond A Inc
- SWIP Sterling Credit Advantage P Inc Net
- Lazard Sterling Corporate Bond Inst Inc
- Standard Life Inv Select Income Inst Acc
- Aberdeen Multi Manager Sterling Bond Acc
- Aberdeen Corporate Bond I Inc
- CIS Corporate Bond Income Trust
- IFDS Brown Shipley Sterling Bond A Inc
- BlackRock Corporate Bond Inc
- Standard Life Inv AAA Income Ret Inc
- Baillie Gifford Investment Grade Bond A Inc
- Newton Long Corporate Bond Inst GBP Acc
- M&G Corporate Bond I Acc
- GLG Core Plus Sterling Bond Ret Acc
- Fidelity Moneybuilder Income
- Allianz PIMCO Gilt Yield A Inc
- Kames High Yield Bond Acc A
- Investec Global Bond A GBP Inc Net
Look up the fund managers
More from us
- Monday Papers: Belgium pays €4bn to take Dexia retail arm
- Cautious start for FTSE after Merkel and Sarkozy agreement
- The historic US downgrade: questions and answers
- Citywire Selection
- Citywire Selection: our bond fund recommendations
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