Investors should “stuff their portfolios” with as many corporate bonds as they are able to buy in current market conditions.
“Many areas of the credit market are very attractively-priced but the challenge is deploying capital into the market,” said Andrew Dyson, MD of Blackrock in the UK.
Speaking at an asset manager roundtable hosted in London recently by investment consultants, Redington Partners, Mr Dyson maintained that credit portfolio losses sustained to date were mainly mark-to-market writedowns which patient investors would make good over time.
However, Bernard Abrahamsen, head of institutional sales and marketing at M&G Investments, contended that certain categories of debt might not get repaid and, in view of the bleak economic outlook, cautioned investors to choose their credits carefully.
“You want to be as senior as you can. Equity-type returns are achievable from secured assets so being senior and secured is vital going forward.”
While warning that the default rate would be high, he believed that defaults would occur in clusters as opposed to happening across the economy as a whole.
“The challenge is to avoid those clusters. It is not just financial institutions that have to de-lever but consumers as well. Beware of those stocks that rely on consumer leverage as a rule of thumb. Also, the default rate will dramatically affect the recovery rate because there is a correlation between increasing defaults and recovery rates particularly if those defaults occur in clusters.”
Paul Bourdon, head of institutional client relationship management at Insight Investment Management, observed that while investment grade corporate bonds offered “fantastic value”, it would be hard to judge the value of higher-yielding credits until liquidity, stability and confidence had returned to the market.
Jeroen van Bezooijen, senior VP at Pimco, advised investors not to think about their liability-driven investment strategies purely in terms of using derivatives to hedge interest rate risk and inflation risk.
“At the moment, swaps are bad value compared to corporate bonds, while UK index-linked bonds are very bad value compared to US inflation-linked bonds. You get a 1 per cent real yield on a linker in the UK, whereas 30-year Tips [Treasury Inflation-Protected Securities] offer 3.25-3.50 per cent.”
Richard Batty, senior strategist, multi-asset group at Standard Life Investments, forecast a protracted saucer-shaped recession and recovery scenario which would force investors to rely on time to generate returns.
He said: “We may not have reached the bottom of our saucer yet. We are looking at five or six quarters of negative growth. Then 2010 will see a bottoming out of the recession and a subdued recovery. We think that yield is the way to play it and risk-adjust that yield. We are unsure about stock dividends but more certain about yields on credits and government bonds where interest rates are close to zero and the prospect of picking up a bond yield of 3-4 per cent is very attractive.
“In balanced funds, we would favour investment grade credits rather than high yield. We would also favour government bonds, but you need a steep yield curve such as the US. We would be underweight UK cash, since the yield on cash is converging on zero and we feel we could beat that. We also favour low risk, high-yielding equity markets such as the UK and US,” said Mr Batty.
