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Gilts reward investors in fourth quarter

Investors in gilt funds were well rewarded in the fourth quarter of 2008, according to an annual review of the fixed interest sector from Standard & Poor’s (S&P) Fund Services.

The average UK gilt fund returned 9.9% in the fourth quarter, totalling 12.2% for the year. Fixed interest funds, however, lost money for the fourth consecutive quarter, with an average 0.1% fall in the fourth quarter and an average 7.2% fall for 2008.

Among the best performing gilt funds in the fourth quarter was M&G Gilt & Fixed Interest, managed by Jim Leaviss, who attributed its returns to his long duration bond holdings. Having unhedged German and American bonds also helped performance, because sterling depreciated against the dollar and the euro.

Richard Woolnough’s M&G Strategic Corporate Bond was also a strong performer between the fourth quarter of 2008 and the first quarter this year. This was largely because of the manager’s underweight to financial bonds, the report says.

In contrast, Old Mutual’s Corporate Bond fund, managed by Stephen Snowden, continued to underperform, with disappointing numbers driven by its financial holdings, AIG, Cattles and Royal Bank of Scotland. Baillie Gifford IG Bond was also dragged down by an overweight to the financial sector.

Fund managers are divided on the outlook for credit, according to the report’s author, Alison Cratchley, the director of fund research. She says that John Pattullo, the manager of the Henderson Preference & Bond fund, expects pessimism to characterise the credit market for some time. The financial sector in particular will be a source of uncertainty until the future of nationalised banks is clearer and a framework for the treatment of bondholders has been established, Pattullo says.

However, Snowden remains optimistic, pointing out that corporate bonds are at their lowest valuations in 100 years, Cratchley says.

Meanwhile, Woolnough does not expect default rates to reach the 25% to 40% that the market has priced in to investment grade corporate bonds. He says that demand will pick up as investors switch out of low yielding cash into corporate bonds because companies are raising capital to fund buybacks.

Several fund managers are negative on high yield, but Woolnough sees value emerging in some segments of this market for the first time in years, Cratchley says.


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