Roberto Carulli, fixed income fund manager at Aegon, believes while European bonds have enjoyed good...
Roberto Carulli, fixed income fund manager at Aegon, believes while European bonds have enjoyed good returns during the equity bear market, the sector has been overlooked.
UK investors have ignored European bonds despite the fact they offer good returns, the ability to diversify exposure between 12 issuing countries and vastly superior liquidity, he said.
'European government bonds are in excess of e3trillion compared to the equivalent of e350bn in the UK,' Carulli added. 'The corporate bond market in Europe is more than e1trillion compared to e350bn in the UK.
'Europe also has a big asset class, the asset-backed security, which is in excess of e1trillion, compared to e35m in the UK. This means a greater level of choice and more liquidity.'
Carulli said the strength of the euro has boosted returns on the European bond market over the past three years and political pressure will see the UK join the single currency, further benefiting the European bond market.
Although UK citizens are not yet in favour of the euro, they are unaware of the benefits of joining the single currency, he added.
'I believe the UK has the best financial industry in Europe,' Carulli said. 'It has the best business model, a good investment process in the fund management industry and is able to compete and deliver. The UK sector will be the leader in Europe if it joins the euro.'
Carulli said European demographics will be a long-term positive for the market as the ageing population will likely be more risk averse and therefore create greater demand for fixed income investment.
Continued restructuring of European pension funds with a greater weighting in bonds will also provide an ongoing source of demand, he said.
The short-term positives for the sector include a bleak economic outlook, with Carulli tipping eurozone GDP growth of just 0.5% in the current year, rising to 1.5% in 2004.
Deflationary risks might affect European bonds although Carulli does not expect real deflation.
'Also, geopolitical risk has become a permanent issue all over the world,' he said. 'These two factors will limit the returns for corporate bonds, which have done well over the past six months, and equity returns.'
Carulli's £8m European bond fund has returned 11.8% over the 12 months to 9 June.
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