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Snowden goes contrarian for bond growth

Old Mutual corporate bond fund manager Stephen Snowden believes that credit spreads now represent a once in a decade rather than once in a lifetime opportunity.

Snowden says double-digit returns in the next six months are a reasonable expectation as corporate bonds are still a long-term recovery play but he adds that whereas everything was cheap six months ago, there are now several areas of the market which are now expensive.

He says: “These areas have been described as common-sense corporate bonds, such as Tesco, Unilever, British Gas, EDF and Vodafone. They are all multinational with brand recognition. During the worst credit market ever, these bonds performed better but they have recovered quickly and dramatically and now trade plumb in the middle of their bull market trading range from three or four years ago.

“Six months ago everything was cheap and the market represented a once in a lifetime opportunity. That opportunity has gone but the market is still offering value and I would say it is now a once in a decade opportunity.”

Snowden says he has become a seller in that area of the market and has almost become a contrarian investor in this area.

He says: “I am not bullish on the pub sector but the senior bonds in pubs are backed on physical assets with robust bondholder covenants, which means, in an extreme scenario where equity is worth zero, the bonds are likely to be worth par, making them huge value. That is one of a number of unpopular sectors we are looking at, with banks another, representing a quarter of the fund.”

“Generically, the market is cheap, barring these commonsense bonds that are not multinational brand names. There are few bonds that can double but a 25 per cent capital gain is still on the table.”

Hargreaves Lansdown senior analyst Meera Patel says: “We are still bullish on bonds as, despite the run they have had, you have to appreciate where they have come from. There are fears on inflation and interest rates but neither is a problem in the near future.”

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