Cazenove UK Corporate Bond fund manager Michel Gonnard believes the majority of funds in the UK Corp...
Cazenove UK Corporate Bond fund manager Michel Gonnard believes the majority of funds in the UK Corporate Bond sector are missing opportunities to add value by avoiding the lower end of the investment grade bond market.
The UK Corporate Bond is the first of a number of sub-funds to be marketed from the group's Oeic, launched to facilitate its drive into the retail market. Further funds are to be made available from the group's 15 Oeic sub-funds, with the next launch likely to be the group's S&P AA-rated European fund, managed by Jean-Marc Fraysse.
Gonnard said the majority of the market is still looking back to the Enron and Energis sagas or concerned over accounting practices and is avoiding dipping its toes back into slightly riskier waters. Instead of looking forward, it is still firmly fixated on the past, he said.
Gonnard said: 'We are relatively overweight compared with our benchmark in the BBB sector of the market, as we believe valuations are cheap and the relative risk rewards are high. The more you diversify the portfolio ' and in bond funds this means increasing the number of issues you hold ' the more yield over and above the index you can pick up.'
He sees very little appetite for risk following the events of the past year. Earnings estimates fell sharply, he said, and a lot of companies went bankrupt thereby affecting sentiment.
The market will continue to be volatile in the short term, he predicts. This is because there is no consensus view on what will happen to UK interest rates and this kind of uncertainty tends to breed volatility in the bond market. If, however, as Gonnard expects, the Bank of England raises interest rates in May, then he believes bond prices may move substantially, as this eventuality has not yet been discounted.
Over a 12-month view, he expects corporate bonds to outperform gilts, but in the event that the Bank of England does raise interest rates, he predicts short-term spreads will narrow.
The fund aims to outperform the Merrill Lynch Corporate Bond Index, which returns on average about 7% a year, by between 75 and 100 basis points. However, unlike other funds in the sector, many of which hold a significant amount of money in other asset classes such as high yield, Gonnard invests almost exclusively in sterling-denominated investment grade bonds. He can also hold up to 20% in gilts.
'There is always going to be someone else doing something different to the rest of the market, as the sector parameters are quite wide. It is important though that investors know exactly what they are buying,' he said.
'That said, we are not slaves to the index. We are independent enough of spirit to take positions away from the consensus. To outperform the benchmark, by definition, we have to take a certain amount of benchmark risk.'
Typically, he holds up to 2% of the portfolio in a BBB-rated holding and up to 7.5% at the other end of the scale, in a AAA-rated bond.
The £180m fund currently has about 85 different issues, from a universe of some 250 issuers.
This includes non-UK-based issuers that issue sterling-denominated debt, as well UK-based companies.
EIS and Seed EIS sectors
'Truly making a difference'
Avoidance, evasion and non-compliance
From 6 April 2019