"Why I'm Backing Bonds"

MICUK 2020: Bonds have provided protection to investors in a torrid year to date as well as decent returns, says Janus Henderson's Jenna Barnard

Holly Black 18 November, 2020 | 10:25AM
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Holly Black: Welcome to the Morningstar Digital Investment Conference. I'm with Jenna Barnard. She is a Portfolio Manager at Janus Henderson. Hello.

Jenna Barnard: Hi, Holly.

Black: So, you've been talking all things bonds today, and I think income is something that's really on the minds of investors this year and the situation has been quite bleak. But you say for the bond world income is still looking pretty good.

Barnard: Yeah. I mean, coupons always rank senior to dividends and in this crisis seems to rank senior to commercial property rents as well. But it has been a remarkably benign crisis for corporate bond investors. Defaults have peaked at much lower level than anyone would have expected. And I think the actions of governments, central banks, bank regulators have really prioritized and favored credit investors because everybody is acting in concert to minimize defaults. So, it has been a really benign crisis for corporate bond investors and very different to '08-'09 and 2000-2001 experience where credit was the problem in those two recessions.

Black: So, default rate is something we would be concerned about in bonds in a recession. It would mean that a company doesn't pay back its debt. It defaults on that loan. Are there areas that look stronger or weaker within that?

Barnard: Yeah. I mean, if you look at the sectors which have defaulted, they're really obvious problem areas. Equity managers might call them the value areas. We tend to call them the zombies, so sectors like energy, shale fracking in the US, traditional retail, obviously some travel names, but very focused hotspots of defaults which quite easy to underweight or avoid entirely. What you haven't seen is a kind of generalised rise in default rates across multiple sectors that you would tend to see in a kind of normal recession. So, yeah, I mean, it's all the obvious areas which are problems year after year recession or no recession. And in our mind, they're very easy to avoid entirely.

Black: So, something we do see when people are looking for income is, they might move into riskier areas. How are you positioned in terms of investment grade and high yield bonds within the portfolio?

Barnard: Yeah. Well, in March, we liked both, frankly. Both were exceptionally cheap asset classes. Investment grade has now performed very well, and I think you have a degree of duration government bond risk inherent in investment grade, which is more difficult for the credit spreads to compensate for some of that, maybe that should've been reducing our exposure to that market since the late summer. But high yields, we think, has been a very favorable spot. You've just passed or are passing the peak in default rates. Credit rating downgrades peaked a few months ago, and we think leverage is also peaking. So, from here, I think high yields will become yieldier, less government bond sensitive areas of the market are the place to be.

Black: So, at the moment, we're seeing lockdown measures tighten up again. There is still talk of a vaccine. What are your thoughts on the coming months? Are you feeling positive?

Barnard: Well, it's quite hard to feel positive when you look at the virus numbers day-to-day, but I think it's really important to distinguish between the virus numbers and lockdown and the economic impact. Because what's going on in Europe in particular is a huge fiscal response. So, the French and the Germans have both announced lockdowns in recent days, but the finance ministers have come out with big fiscal packages to try and dampen or even completely mute the economic impact. The German finance minister talked about a massive fiscal aid for affected sectors. The French finance minister said they're willing to do even more economic support than they did in the first lockdown. And then that tends to get lost. But I think it's important just to – not just read about the virus, but the ability of fiscal policymakers to dampen the economic impact and support household incomes and businesses. And we look at it from that perspective, it does feel a lot more positive.

Black: Jenna, thank you so much for your time. For Morningstar, I'm Holly Black.

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Holly Black  is Senior Editor, Morningstar.co.uk


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