Royal London Asset Management's (RLAM) head of fixed interest Jonathan Platt has highlighted the importance of spreading portfolio risk during challenging times for bond investors.
Talking to Professional Adviser and Investment Week editorial director Lawrence Gosling as part of a new series of video interviews with the group's investment team, Platt said: "At an individual stock level we are big believers in risk spreading but also getting close to the assets of the issuer.
"For this reason we like secured bonds where we can get a claim on assets."
Turning to the UK's exit from the European Union, Platt admitted that not knowing the terms of Brexit "creates difficulty", largely because growth and inflation implications are unknown.
Added to this, the UK has "basically been in a 30-year bull market for bonds. Yields are very low, historically off the chart of where they have been, and so the risks are they start going up again."
Eric Holt, head of credit at RLAM, added the right strategy is to diversify portfolios where there are many potential points of liquidity.
"One of the critical things is to avoid paying for liquidity when it is not needed. Having a longer-term horizon means we value assets over the medium term, and our trading activity complements that release of value over the medium term - rather than being the primary focus.
"It is important to communicate with clients too, so they understand what we are trying to do."
At a time when prospective returns for fixed income are challenged, RLAM has also included global high yield in its approach.
Azhar Hussain, head of global high yield, explained: "The higher level of risk in this arena means the compensation you get for the credit spread is a much larger portion than the interest rate component."
He highlighted the credit spread can be broken down into three different risks: "The first and most important is the default risk of a company. As companies take on more debt, pricing the probability of that default is crucial to investing in a company.
"Secondly, in the event of a default, working out what your recovery would be - what sort of assets you are secured or not secured on, where you rank in the capital structure of the company - allows you to price the default risk of a company.
"The last risk relates to the technical components of a credit spread - liquidity and volatility risk. There are lots of new jurisdictions where certain investors can invest and others can't. Pricing that illiquidity and volatility allows you to work out the true valuation of a high yield company."
Investors' ongoing search for yield will be a key theme that continues for the next five years, Platt added.
"In this environment, you get paid to take risk. There is value in high yield and investment grade credit but most importantly, managers should look to give investors the broadest spread of cashflows because we are in uncertain times.
"Yes, there are pockets of value - but make sure you spread your risk."
'Confidence in protection is low' - Aegon
Following office refurbishment
Start with the ‘why?’
After 20 years in Westminster
Retired in 2014