Barings Asset Management and Cazenove Capital agree corporate bond fund liquidity is an issue that needs to be looked at after the FSA raised concerns about managers’ ability to cope with large-scale redemptions.
The regulator recently sent a letter to corporate bond fund managers asking what risk controls and monitors they have in place to manage large-scale redemptions in the face of low market liquidity.
Barings fund manager Andrew Cole, who runs the £339.3m Baring Multi-Asset fund, has around 7 per cent of the fund in corporate bonds. This is divided between three managers but he says he could increase this to four or five managers to dilute the holdings of each bond.
Cole says: “We have not increased our exposure to corporate bonds because of concerns about liquidity. Banks have been issuing a lot of paper to recapitalise themselves so we are making sure we are not over-exposed. If lots of people try to exit it could take a while to get out and prices could fall a long way.”
Cazenove head of multi-manager Marcus Brookes says the FSA is right to look at corporate bond liquidity, but investors should not avoid corporate bonds altogether. He says: “Our approach is to have multiple holdings in corporate bond funds.”
Brooks Macdonald head of investment strategy Gemma Godfrey says capping exposure to each bond fund is a good idea. She adds: “Another way to mitigate risk is to monitor the fund’s cash positions on a monthly basis.”