View the article online at http://citywire.co.uk/money/article/a600301
Spreadbury on the defensive with 'safe haven' corporate bonds
Bonds secured against physical assets offer protection against liquidity risk, says Ian Spreadbury, manager of the Fidelity Moneybuilder Income fund.
High-quality corporate bonds provide a safe haven for investors' cash and also offer value in the current volatile backdrop, according to Ian Spreadbury, manager of the Fidelity Moneybuilder Income fund.
Spreadbury is wary of liquidity risk in such an environment, so remains in relatively defensive mode, with 17% of the £3.5 billion fund invested in safe-haven assets such as government bonds, cash and supranationals. A further 19% of the fund, which features in Citywire Selection, is held in utilities.
Physically backed assets
With his top three positions in UK gilts, much of the remainder is in bonds secured against physical assets.
'I want to be quite liquid in this environment and it is also a reflection of the risks to growth which I think have increased in recent months. Most of my utilities are regulated so the level of safety is quite good,' he said.
Further protection comes from having 12% of the fund in asset-backed securities across a diverse range of sectors, all at senior levels of debt. Spreadbury cites the Trafford Centre retail park as a prime example.
'The bonds we own here are senior in the structure and secured on the development. The quality is extremely high.'
Credit exposure trimmed
Spreadbury has also been trimming his credit exposure and using the proceeds to take advantage of opportunities gilts when they have presented themselves. He believes 10-year gilt yields could fall below 1%, but that it would for a limited period of time.
'In the near term the problems in the eurozone could cause gilt yields to grind lower, but at these levels I see limited price upside over a longer time frame. It is possible yields could go below 1% on 10-year gilts, but I think they are unlikely to stay there for a meaningful period of time.
'Gilt yields are the lowest in over 100 years and probably the lowest ever, so this is a reflection of this extraordinary economic environment where the private sector is deleveraging and conventional monetary policy is not working.'
Financials underweight remains
Spreadbury continues to be underweight financials and those bonds that he does hold are generally short duration. Some 11% of the portfolio is in banks, with 5% of that covered.
'I don’t think it makes sense [to have too much in] such a volatile sector, which is tied up with sovereign credit quality.
'These covered bonds are secured by mortgages with a high level of coverage so that the safety level is very high. Nearly half my banks exposure is in secured bonds.'
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