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Corporate bonds have lost their lustre, says income manager

Schroders equity income co-fund manager Nick Purves says corporate bonds are less attractive than they were earlier this year.

At a UK specialist equity and value round table discussion last week, Purves said a drop in yields and increased risk appetite had reduced their attraction.

He said: “Generally, we do not think they are as attractive. What we are trying to do is buy corporate bond-type risk offering equity-type returns, so double-digit returns.

“At the beginning of the year, you were able to do that. I think it is fair to say that option is no longer available, given that risk appetite has increased quite a lot and an enormous amount of money has gone into corporate bond funds and that has pushed yields down across the board.”

Schroders equity income fund, co-managed by Purves and Ian Lance, is just over £1bn. It can hold up to 20 per cent in non-UK equities but currently has 15 per cent with 10 per cent in overseas equities and almost 5 per cent in corporate bonds.

It bought a Lloyds bank bond issued in March to boost income and potential capital opportunities.

M&G corporate bond fund manager Richard Woolnough says: “Although credit no longer represents the once in a life-time opportunity it did earlier this year, the asset class still looks relatively cheap and investment-grade bonds still represent good value.”

Bestinvest senior investment adviser Adrian Lowcock says: “They probably represent fair value at the moment. If you have got corporate bonds, you would stay in them as you are still getting paid a good yield.

“You might want to take a little bit of profit out but the trouble is where would you put the money because equities look relatively expensive in the short term.”

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