Corporate bonds: is now the time to buy?, May 2022

Sterling corporate bond fund managers have had a challenging time of late, with the average fund down almost 8% over the first few months of the year*.

And while IA Sterling Corporate Bond remains the sixth most popular sector for UK investors, with £64.2bn of funds under management**, it’s fair to say that they have become less enthusiastic about it in recent months - the sector experienced £341.6m of net outflows in March alone**.

Here, we’ve collated the views of a number of fund managers on their expectations for the sector over the rest of 2022.

Looking expensive

Richard Woolnough, manager of the M&G Corporate Bond fund, says a raft of global issues have made it a tough period. “High uncertainty persisted in March 2022 because of international events and a mixed economic outlook,” he said. “All bond markets had a poor month, with major government bonds and high-quality corporate bonds key underperformers.”

This, of course, had an effect. “Fund performance was negative, although having a more cautious view on corporate bonds may have helped limit losses,” he added. “We remain cautious on holding too many UK corporate bonds as they appear expensive.”

Not all bad news

But with challenge comes opportunity. “In the last few weeks, we’ve started to see significant outflows from bonds funds, particularly passives, which are often selling with poor liquidity,” said David Coombs, manager of Rathbone Strategic Growth Portfolio. 

“We’ve taken the opportunity to tentatively buy some credit for the first time in years, mostly for the lower risk funds in the range, as 3.5% to 4% yields look quite attractive on our three-view (where inflation falls to around 3%, and interest rates will have long-since peaked). We’ve plenty of cash to be more aggressive if we see more capitulation over the next few weeks.”

Financials look attractive

GAM Star Credit Opportunities co-manager Gregoire Mivelaz believes subordinated financial offer opportunities: “This is a very challenging environment for fixed income investors in general, but it is actually supportive for our asset class,” he said.

“Financials tend to benefit from this inflationary/ higher interest rates environment and subordinated debt should outperform senior unsecured debt. The asset class can generate a high, steady, quality income from some strong issuers that can perform well in a rising rate environment.”

BBB bonds also looking good

Jim Caron, chief strategist and portfolio manager in the global fixed income team at Morgan Stanley Investment Management also believes there are opportunities. He favours BBB-rated corporate bonds.

Corporate bonds are rated by different agencies. One of them, S&P, has a scale from AAA to D. The former are bonds of the highest quality and have an “extremely strong capacity to meet financial obligations”. With the latter, the company has already missed a payment on its debt and is highly unlikely to repay what is outstanding. In between are AA, A, BBB, BB, B, CCC, CC and C.

BBB bonds sit on the lowest rung of the investment grade corporate bond scale, being of “adequate capacity to meet financial commitments, but more subject to adverse economic conditions.” But just one wrong move and they could be downgraded to BB and get a high yield or “junk” status.

“We are cautious on those with ratings of A or above, which are more interest-rate sensitive,” Jim said. In addition, he warns investors to be wary of companies with merger and acquisition risk as corporates making changes to their capital structures can dilute valuations for bondholders.

Ben Edwards, manager of BlackRock Corporate Bond fund is also favouring BBB rated bonds, with more than half of the portfolio allocated to this area of the market***. He is, however, more positive on A rated bonds, with a 37% allocation***.

Above all, expect volatility

Chris Bowie, manager of the TwentyFour Corporate Bond fund predicts markets will continue exhibiting volatility for some time to come. In an update, he wrote: “By focusing on higher conviction, short and medium dated investment grade (those with less time to maturity), and keeping positions restricted to our best ideas only, we believe we can continue to generate some of the best risk-adjusted returns in the corporate bond sector, whilst keeping capital preserved to a greater degree than others in periods of volatility.”

Likewise, Stephen Snowden, manager of the Artemis Corporate Bond fund, also expects this year to be more volatile than 2021. “On the one hand, market participants will continue to fret over more persistent inflation and the risk of central banks raising interest rates – but on the other hand, the strong macroeconomic backdrop should support corporate bond markets,” he said.

Alex Pelteshki, co-manager of Aegon Strategic Bond fund, concluded: “We expect to continue to see elevated volatility until the end of the year, albeit our base case is that it will slowly diminish from the highs seen in the first quarter of 2022. Central bank words and actions will continue to be the dominant market driver.

“We are unlikely to have seen the full repricing of government bond markets. This, in turn, means that we are also unlikely to have seen the full impact on risk assets/credit spreads either.

“For a change, however, investment grade bonds do not currently look so bad on a total-return basis, after the dismal start of the year, while high-yield bonds look to have room to reprice wider (down) if the slowdown becomes more pronounced.

“From a portfolio management perspective, the violent market repricing has opened-up more opportunities to capture opportunities as well as to protect capital, than we had at our disposal on January 1st.”

*Source: FE fundinfo, total returns in sterling, 1 January to 16 May 2022
**Source: Investment Association March 2022
***Source: fund factsheet, 30 April 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund managers and do not constitute financial advice.

Published on 23/05/2022