In April the European Central Bank dripfed investors more details about its corporate bond buying programme, which had caught the market by surprise when it was announced a month earlier.
Whether or not the expanded €80bn-a-month asset-buying programme, which already includes government debt and mortgage-backed notes, will achieve its aim of boosting the real economy, corporate bond markets have taken note. After nine months of almost continuous outflows, fixed-income funds enjoyed inflows of €11.6bn in March, data from Morningstar reveals.
European corporate bonds and high-yield bonds had some of the largest turnaround in the sector, with inflows of €3bn and €1.7bn respectively, following outflows of €3.8bn and €1.9bn in the first two months of the year.
The corporate bond-buying programme will exclude banks but will cover investment grade products with a maturity range from six months to 30 years, as well as senior insurance bonds, crossover credits and bonds from outside the eurozone. The central bank would buy up to 70 per cent of the outstanding total of any eligible bond.
Axa Wealth head of investing Adr-ian Lowcock says: “Yields are going to fall, which means prices are going to rise. What types of corporate bonds are they actually going to be buying? You’d expect them to be buying bonds of companies that have previously been described as dividend proxies. So, the very low risk, very reliable companies.”
Wellian Investments investment director Chris Mayo says with the existing bond issuance available you can make some general calls on which assets will benefit most. He says: “When you look at the universe, taking out all the banks, what you’re left with is France, Netherlands and then Germany – they are the biggest country profiles, and utilities is the biggest sector.”
Within fixed income Mayo says the “BBB area is the most exciting for us”.
“If you announce you’re going to be buying a certain part of the market, the market prices that in very quickly. The person who suffers from that the most is the buyer, that is, the ECB”
Insurance bonds, such as Italy’s Generali and Germany’s Allianz, jumped in price when it was revealed they would be included in ECB president Mario Draghi’s programme.
Lowcock says: “This has always been one of the challenges of QE. If you announce you’re going to be buying a certain part of the market, well, then the market prices that in very quickly. The person who suffers from that the most is the buyer, that is, the ECB.”
While the ECB has not disclosed how much it will be pushing into corporate bonds, analysts have estimated a figure of around €5bn. To provide a sense of scale, Europe’s largest corporate bond fund, the Schroder ISF Euro Corporate Bond fund, has €6.7bn. There is some indication from flow figures that larger funds have benefited the most from the ECB action, with Schroder’s fund topping the list for March inflows with €490.3m.
Chelsea Financial Services managing director Darius McDermott says investors aiming to benefit should look at funds with at least 15 per cent exposure to European corporate bonds.
He says: “It’s difficult to be hugely positive on the asset class, but I think the asset buying does give support over the next 12 months.”
Among his picks are M&G portfolios, namely the Corporate Bond and Optimal Income funds, Invesco Perpetual’s Corporate Bond and Monthly Income Plus funds and the Fidelity Strategic Bond and Jupiter Strategic Bond funds.
Lowcock says an active approach works best so that investors can avoid pockets of risk.
He says: “I’d prefer a broader approach, where you’ve got a global bond fund that uses derivatives to effectively profit from the portfolio, something like the BlackRock Fixed Income Global Opportunities fund. It’s not necessarily one for income seekers, but for those seeking bond exposure as a strategic allocation.”
iShares fixed income strategist at BlackRock Vasiliki Pachatouridi says investors wanting to take a view on the asset class rather than single-name bonds could benefit from the ECB’s actions by buying into an exchange traded fund that tracks European corporate bonds ex-financials.
European fixed income index funds have indeed proved more popular recently, only suffering one month of outflows in the past 12 months compared with eight months of outflows in active funds.
But M&G manager of the Episode Defensive fund and co-manager of the M&G Episode Macro and Episode Growth funds Eric Lonergan argues the ECB stimulus is inconsequential to those taking a macro view. He says the market is more interested in issues such as regulatory concern within the banking sector, fears about Chinese growth and the correlation with credit risk in other markets.
He says: “When you’re testing the success of a policy like that you want to see some impact in the specific assets you’re looking at, but you also want to see that transmitting to a macroeconomic effect. What’s clear is the macro-economic effects of it are most likely trivial.”