Hand-Picked Funds in the Corporate Bond Sector

Morningstar pinpoints some Gold, Silver and Bronze-rated funds to consider in the increasingly popular corporate bond sector

Anthony McDonald 1 November, 2012 | 1:23PM
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Assets Flowing into UK Corporate Bonds

According to the Investment Management Association (IMA), the sterling-denominated corporate bond sector has led the way in net retail flows every month this year except March.  Buoyed by this weight of money, UK corporate bond indices returned nearly 10% over the first eight months of the year.  Yet these flows have led M&G to restrict inflows into its corporate bond strategies and served to increase focus on a sector where liquidity concerns many investors and remains a focus of the Financial Services Authority(FSA).  It therefore seems an opportune time to consider the health of the asset class and highlight some of the funds available to investors.

A Mixed View for the Asset Class

Following a period of strength, the managers we speak to now have increasingly mixed views on the outlook for the asset class.  The difficulty, of course, is in setting asset class expectations in an environment where the “risk-free” rate is distorted by central bank policies and there is a degree of nervousness at the low yields now being paid by corporate issuers, with the potential for capital loss should government bond yields rise meaningfully. 

However, fund managers are equally aware that quantitative easing policies are designed to suppress sovereign borrowing costs and force investors to continue buying riskier assets such as corporate bonds.  As a result, many funds remain overweight credit risk but this position is very differently constructed across the universe; some investors are positive on the value offered by higher-risk bank bonds, while others prefer to focus on more stable, defensive sectors despite their increasingly tight yield spread over gilts.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Anthony McDonald  is a senior fund analyst at Morningstar OBSR in London.

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