Theo was (and is) the antithesis of many fixed-interest fund managers. She is vocal, colourful and brash. It was a coup for New Star when she agreed to join John Duffield’s then fledgling outfit for its bond push. Sales of New Star bond funds soon rocketed.
Theo is always quotable because she rarely sits on the fence. A couple of years ago, before the credit crunch had reared its ugly head, she proclaimed that bonds would not make you any money and you would be better off in other assets.
She is now ensconced at Axa and I bumped into her at the Investment Management Association’s annual bash at the Grosvenor a fortnight ago. Given all the mutterings about the new dawn for bonds, I asked her whether she would suggest that an investor should buy her fund. A resounding no, came the reply. Then, with her PR by her side, came the caveat. She meant no to her fund in particular, as she inherited some poor holdings. No doubt, in time, it will be a buy.
But Theo did admit that there was great value to be found in the right fund. She is not a lone voice. Rival bond managers are out in their droves. The famous Invesco Perpetual duo, Paul Causer and Paul Reid, who have been rather less than vocal of late, have put their heads back above the parapet proclaiming that there is “compelling” value in credit. Ditto the opinion of Henderson’s John Pattullo.
However, there is a feeling of deja vu. This time last year, bond managers persuaded me to moot that perhaps it was time to consider corporate bonds. Had any investors followed my lead, they would have seen their fund fall by around 10 per cent. So much for a safer haven.
Apparently, the bulls of a year ago tell me, investing in bonds would have been a decent call had Lehman Brothers not collapsed. Well, that’s all right then. Bond fund managers are feeling bullish again because of spreads which are back to levels not seen since 1929. We are entering the “decade of credit”, according to Deutsche. Go back to 2007 and the spread on a BBB-rated bond was 1.5 per cent. Today that spread is 6 per cent.
The arguments in favour of bonds are certainly strong. With interest rates tipped to fall below 1 per cent, their yield will be enticing. Corporate bond markets typically recover before equities after times of economic woe.
What’s more, bond prices are pricing in default rates of 35 to 40 per cent. Yet looking back over the years, the worst-case scenario default rate for investment-grade bonds was 2.4 per cent. Some bonds, such as Imperial Tobacco, are yielding 9.4 per cent. A small narrowing of spreads will double your return. From an investor’s point of view, there is the added bonus of tax-free status inside an Isa because income is not treated as a dividend and so they still get the 20 per cent tax credit.
But the bond story is not a no-brainer. The market is illiquid and many bond funds have exposure to tier 1 bank debt which they cannot offload. A splurge of gilt issuance by our Government will mean that there will be no shortage of stocks to choose from.
Amid all the bulls, there is at least one bond manager – John Anderson from Rensburg – who sounds a word of caution. For those able to look at the market with a medium to long-term horizon, he says, there is clearly great value on offer. However, he warns that “such value does not come without risk and investors in this market have to be doubly certain that the bonds they buy are of the right maturity date, in the right sectors and from the safest issuers”.
Fill your boots in bonds by any means, just check under the bonnet of the funds before you buy.
Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing