View more on these topics

Legg up

Stockmarkets have had a strong bounce since reaching a low in early March. The debate now is whether this is the start of a new bull market or a so-called “bear market rally”, with further falls just around the corner. The jury remains out.

My personal view is that, although positive for the long term, I am not sure we can have a real bull market just because things have started getting worse more slowly. Only time will tell, but it does seem as we enter the summer that many stockmarkets are ripe for a short-term dip.

Consequently, it is interesting to see that Legg Mason is launching a global blue-chip bond fund rather than an equity offering. It will be managed be Western Asset Management, one of their subsidiaries and a specialist bond house. The obvious question to ask is: Why now?

First of all, valuations look very attractive with credit spreads close to their all-time wide levels. In English, that means the difference between corporate bond yields and government bond yields is the biggest it has ever been. The spread between them tends to widen at times of economic stress and narrow when things settle down.

At the moment the spreads seem to imply that more than 30 per cent of investment-grade bonds will default over a five-year period. I believe this is unrealistic. To put this in perspective, even in the Great Depression defaults did not reach 5 per cent over any five-year period. So this suggests bonds are being valued far too cheaply and that there are excellent bargains out there.

Legg Mason also cites stronger balance sheets in the US as companies put things in order ready for a tough period ahead. Supply and demand have both also picked up this year, and while I expect demand to remain strong, supply will probably tail off as companies stop issuing debt to buy back their stock. Added to this, there has been a trend of pension funds in the US moving more money into corporate bonds. This should be a positive environment for bond prices.

The new global blue-chip bond fund will focus on high quality investment-grade corporate bonds from across world markets. The managers will seek to minimise risk where possible and so will have a maximum weighting in the finance, insurance and property sectors of only 10 per cent. This is the area that has caused bond investors the most grief over the last year or two.

It will also be required to invest only in bonds with a relatively high credit rating (at least A-) as the fund looks to produce a yield of a little over 5 per cent but with minimal risk. In practice, this could be seen as the first stepping stone for investors who want to move away from government towards corporate bonds, moving to the next stage in terms of risk. The biggest holdings at launch are to include bonds from firms such as Hewlett Packard, AT&T and AstraZeneca.

Western Asset Management may not be well known but they manage a vast amount of money in bonds across the world and have one of the largest credit analyst teams around with an average experience of more than 16 years.

Bond funds should not be seen as a replacement for cash, but if you already have enough on deposit and are looking for ways to boost your return then they are worth considering. Although a cautious fund such as this should have relatively low volatility, it should be remembered that it can still fluctuate in value – that is why it is not a substitute for cash. Remember too that the prospect for future inflation will also undermine bonds although, in fairness, the fund can bring its duration down to about two years.

Although stockmarkets have rallied, bonds have only rebounded a little way. This means corporate bonds still have ample room for long-term growth.

Mark Dampier is head of research at Hargreaves Lansdown

Recommended

Rich pickings

The idea of being sufficiently wealthy to be able to live outside the UK while being close enough to take advantage of its commercial and social facilities has been attractive for many people throughout many years.

Fit for porpoise

As a child of the Sixties, I was convinced that Flipper was a dolphin but the recent debacle in the House of Commons has brought me firmly into the current day. Watching the avoidance of capital gains tax and the maximisation of second home allowances, Flipper is probably an apt moniker for many MPs.

Budget boost for offshore bonds

One of the most apparent effects of last month’s Budget was a growth in the numbers of individuals, families and companies seeking tax mitigation strategies.

Retirement - thumbnail

(Another) downhill stroll — retirement planning

A report published this morning by the CIPD (CIPD Employee Outlook March 2015) provides yet more interesting data to the changing landscape of retirement planning. It should be remembered that we are in a period of genuine flux here given that the default retirement age was scrapped three years ago, and new pension freedoms come online in April. Both of these alterations will have a huge impact on how employees plan for their retirement.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment