Asset Allocator's Soapbox: Marianne Weller

This week: Marianne Weller of Fund Intelligence assesses corporate bond funds

With interest and saving rates at historic lows and the FTSE All Share yielding 3.42% and 10 year UK treasury gilts just 2.88%, both as of 27 August, the challenge for IFAs and their clients is to source a good yield, beating inflation (CPI), without taking excessive risk.

One solution is the corporate bond sector. The IMA requires that funds in this sector have at least 80% invested in investment grade bonds (AAA-BBB rated) with the fund managers able to invest the other 20% where they see value.

The corporate bond sector has been widely seen as an area used by investors seeking yield.

However, with modest growth forecasts for this year, and interest rates expected to remain low, the environment is ideally suited to corporate bonds. The fact is many companies have spent the last couple of years repairing and/or improving their balance sheets.

This is taking more overt risk than just investing in gilts, but in return inflationary protection is acquired and as the investment is more diversified, the risk too is diluted. After all this is unlikely to be a short-term issue – most see the current economic factors continuing for the next 12 months at least.

When considering a corporate bond fund for your clients, the following need to be considered:

● The weighting to AAA, AA, A and BBB: although BBB is still investment grade these bonds carry more risk as there is invariably a higher likelihood of a downgrade to high yield.

● Sector breakdown: where is the fund invested, what weighting is in financials and banks? A fund that has a heavy weighting to banks/financials will carry more risk than one invested in more defensive sectors like pharmaceuticals.

● The quality of the bonds: what quality of paper is the fund invested in, for example senior paper is of a higher quality/more secure in the event of a default for the bond investor than tier
1 paper?

● Any sector/company bets: is the fund manager taking any significant positions which could have a big impact on the fund?

● Look at the experience of the fund manager and investment house: Will the fund manager will be able to add value through their knowledge of the markets and the research team constantly analyse bonds and support the fund manager?