Spreadbury ‘buffered’ against investor flight risk

Top bond fund manager Ian Spreadbury (pictured) says he has a ‘buffer’ against the risk of bond market liquidity worsening, warning that the low liquidity which has prompted concerns from the City regulator is ‘unlikely to improve any time soon’.

‘If investors take fright or inflation picks up or the UK were to lose its safe-haven status, investors could take flight and start to exit…historically investors tend to move at the same time. That’s the real concern, everyone is a seller at the same time,’ the Fidelity fund manager said in reference to concerns about the low level of liquidity in bond markets, which the Financial Services Authority has raised with asset managers.

Answering questions on a conference call with investors, Spreadbury was referring to a resurgence of ‘liquidity risk’ – the risk that a fund manager won’t be able to sell a bond as supply outstrips demand from investors who no longer want the perceived safety of high bond exposure they craved in the aftermath of the credit crisis.

Spreadbury, who manages the Fidelity Moneybuilder Income fund, a 'star pick' of Citywire Selection, said net issuance of bonds by companies had been negative, as companies were merely refinancing existing debt, rather than investing anew.

Spreadbury said an 8% exposure to highly liquid investments such as government bonds, supernational bonds and cash in his £3.25 billion Moneybuilder fund protected him against such risks. ‘It gives me a buffer, but clearly I don’t expect liquidity in the market to necessarily improve substantially going forward,’ said the investor, who also manages the Fidelity Strategic Bond fund .

He said this would not affect the way he runs the fund and further action – such as ultimately closing the fund – would only be taken in extreme circumstances.

Economic risk

Overall, Spreadbury said he was focusing on investments that were less sensitive to the economic cycle – he again reiterated his view that the UK was set to lose its AAA credit rating – while staying underweight financials.

'I do think there is particularly good value in corporates', Spreadbury said, adding that 19% of the Moneybuilder fund is in utility company bonds including Northumbrian Water, United Utilities and Severn Trent.

Half of the portfolio is invested in BBB-rated bonds (which qualify as investment grade), such as BT and Tesco. 'There are some very good quality companies with yields substantially over government bond yields,' he said.