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Ariel view

A new name has appeared among the elite of fixedinterest fund management. I have been keeping an eye on Ariel Bezalel since the launch of the Jupiter strategic bond fund in 2008 and he has not disappointed.

The fund has risen by 37 per cent against 13 per cent for the average fund in the strategic bond sector. Unlike many bond funds that concentrate in one area of the market, it has a flexible approach and the manager is able to invest across the fixed-income spectrum, ranging from gilts to investment-grade bonds as well as riskier high-yield securities. He also has the flexibility to invest outside the UK, something he has taken advantage of in the last year by buying the sovereign bonds of Australia and Canada.

His approach, like many bond managers, is to study the economic environment and to consider the prospects for inflation and interest rates in detail. This is quite a task, given the amount of economic data to be digested and the wild gyrations in the markets from one day to the next. It takes a cool head to navigate through all this.

At present, Ariel believes the market is right to be concerned about deflation, particularly in America where disappointing job numbers show the number of people out of work for longer than six months is at its highest since 1948 when records began. Unfortunately, this is unlikely to get better soon as the key to any recovery is the housing market and this is still struggling. Like other bond managers I have mentioned before, Ariel is convinced interest rates are likely to remain on hold for quite some time, given this scenario.

He also thinks further quantitative easing by the Federal Reserve in the US and by the Bank of England is fairly likely. As I have said many times over the last few years, the West simply has too much debt. The process of deleveraging will be painful and will hinder economic performance. It is therefore likely that governments and central banks will do all they can to ease the situation through less conventional methods as well as low interest rates. That said, Ariel does not believe we will necessarily see the double-dip recession that many fear.

Instead, he envisages a slow grind, which could be quite a good background for corporate bonds. It implies that default rates will stay relatively low as well as ensuring low inflation and interest rates. In this environment, demand for high-yielding assets should be high.

The main area in which Ariel sees the most compelling value is financials, particularly UK banks such as Lloyds, Barclays and RBS. There is no exposure to the Irish banks or the Club Med area because Ariel thinks sovereign debt worries will resurface again. My own view is the Greeks will end up defaulting on their debt.

He has recently taken some profits from this high-yield exposure after the strong rally that we have seen but he points out the technical picture still looks good for these bonds as more investors scramble for income generating assets.

Outside the UK, he has been buying Australian government bonds which yield over 5 per cent. In contrast to the West, Australia looks attractive. It has strong finances, vast mineral wealth and interest rates that look to have peaked now that unemployment has risen and house prices have stalled. He has a 10 per cent position in Canadian government bonds for similar reasons.

Although the exceptional returns from bond markets over the past year are unlikely to be repeated, there are still plenty of opportunities, particularly in corporate debt.

Some have called a bubble in bonds but I think that is premature with the economic background we face. The added flexibility of this fund should see you through the pitfalls while delivering a yield far higher than can be achieved on cash, presently over 6 per cent. If you are considering a bond fund, I believe this one deserves to be on your list.

Mark Dampier is head of research at Hargreaves Lansdown


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