View the article online at http://citywire.co.uk/money/article/a875621
Paul Read bags bond buying opportunities after crash
Invesco Perpetual bond fund manager is trading his way out of the New Year bond crash and says his team have £3 billion cash to deploy.
Invesco Perpetual bond fund managers are looking to deploy some of the £3 billion cash pile they have accumulated in their funds following sharp falls in global fixed income stocks since the New Year.
Paul Read, co-head of fixed income at the group which manages £28 billion in bonds and loans, said his colleagues had held back from investing the money over concerns at the high valuations and lack of liquidity in the bonds market last year.
Read, the Citywire A-rated co-manager of the Invesco Corporate Bond fund and the City Merchants High Yield (CMHY ) and Invesco Perpetual Enhanced Income (IPE ) investment trusts, has for some time urged investors to be cautious about the prospects for bonds as a 20-year bull market peters out.
However, the tough start to the year, which has seen bond prices slide in tandem with shares over concerns about the impact of the low oil price and the slowdown in China, has made Read more positive. This was despite the disappearance of new bond issues as investors shut the door on companies trying to refinance and borrow more money and as investors pulled money out of the group’s bond funds.
‘It’s messy. But I think it’s improving. The market is getting more interesting – not what I predicted!' he told delegates at a Winterflood Securities conference in London yesterday.
The manager said he had seen declines of up to 9% in bonds from good quality issuers as contagion from the slump in US high yield – or ‘junk’ bonds – had spread. ‘A week is a long time right now in these markets,’ he added.
Nevertheless, this had created buying opportunities in good credits such as Tesco and Lloyds Banking Group, Read said.
Read was particularly keen on Tesco’s 6.15% 2033 dollar bond which he bought at the end of 2014. Although its price had fallen well below its launch price of 100p to about 88p, this gave the retailer’s senior bond a yield of 7.2%. ‘The bonds are really interesting investments from here,’ he commented.
By contrast Read continues to shun Glencore. The 1.25% eurobond issued by the mining giant last March has slumped in value to around 60p. As a result the bond’s yield has soared to 9.1% although that was not enough to tempt Read who said he had never liked the company. ‘I just thought it was a way to make a few guys rich,’ he said.
However, a spike in yields on emerging market debt has caught Read’s attention. ‘We’re sharpening our pencil on emerging markets,’ he said, pointing to the 9% yield on the Global Emerging Market Sovereign and Credit Index as an indication of value.
Investors pull out
The manager (pictured) has had to battle with a surge in sales by worried investors following the first rise in US interest rates in nine years last month.
Read revealed that Invesco Perpetual bond funds had suffered net outflows in the first few weeks of the year. This followed the team’s third best ever year for asset gathering in 2015 when it attracted a net £2.5 billion from bond investors, after adjusting for redemptions and market movements.
‘It’s more than manageable but we’ve had net outflows for the first few weeks of the year,’ he said.
Although the post-crisis exodus of investment banks from acting as bond market makers has made life difficult for bond fund managers, Read said he had bought and sold $350 million of bonds that morning.
‘In practice we are getting a lot done but it’s not how it was. It makes marginal decisions to buy and sell more serious,’ he said.
No room for error
Read’s repeated refrain was there was ‘very little margin for error’ as bond prices remained high and yields consequently very low by historic standards.
He pointed out that yields on German 10-year bunds (government bonds) had begun and ended 2015 at the same level. That apparent calm masked a damaging sell-off in April to June last year when prices fell and yields shot up from an all-time low of 0.5%. That meant a potential capital loss of 8-9% for investors who panicked, which was 16 times more than the income they had been receiving on their investment.
Read said investors in UK government bonds, or gilts, faced similar risks with ten-year yields of under 2%.
Even more remarkable, he said, was the revival in Italian and Spanish sovereign bonds, which now yielded only 2% more than bunds, having traded at much wider ‘spreads’ over German bonds at the height of the eurozone debt crisis a few years ago.
Read and co-manager Paul Causer have avoided high yield debt from US energy groups that have been at the centre of the bond storm since late summer. Nevertheless, similar bonds outside the energy sector looked attractive after yields on European and US ‘junk’ bonds jumped 6.2% and 8% respectively over German and US government bonds.
‘You have to be a little bit careful saying its relatively cheap – but it’s cheap and the issues we found in 2011 and 2012 are not the same now,' he said.
Despite this Read remained broadly more positive on equities rather than bonds, arguing that the higher dividend yields from shares would support the stock market as investors continued their quest for income in a low interest rate world.
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