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THE INVESTOR
THE INVESTOR CENTRE
A
fter experiencing a bout of weakness
during Q1 2014 with spreads
widening, UK investment grade bonds
performed quite well during Q2 2014.
Spreads tightened and corporate issues
handily outperformed gilts on both a total
and excess return basis.Media/cable
and telecomwere some of the better-
performing industries during the period,
while food/beverage and automotive
lagged most other industries. For the
second quarter of 2014, security selection
decisions weighed on relative results.
Names held in the insurance (speci cally
multi-line issuers), energy and services
sectors underperformed. Choices from
within the communications industry were
also detrimental on a relative basis. Banking
and asset-backed issue selections did help
to partially mitigate underperformance.
Sector allocations were advantageous to
relative performance.An underweight
stance in supranational bonds added value as
did overweight exposure to the insurance,
technology & electronics, and energy spaces.
An excess allocation to automotive names
did lessen gains slightly. Overall, portfolio
duration remained closely aligned with that
of the benchmark, generally neutral with
a slight bias towards the longer end of the
curve.The overall impact was marginally
positive as the GBP yield curve generally
experienced downward pressure on rates
across nearly all maturities.
LOOMIS SAYLES
Investment Grade Corporate Bond
UK investment-grade bonds perform
well after a spell of weakness
Security selection
decisionsweighed
on relative results
Kenneth M. Buntrock
W
e continue to see plenty of
behaviour that echoes the pre-
crisis years of 2006/07. Debt is cheap
and corporates (via mispriced high-yield
debt) and consumers are loading up on it.
We have economic growth in the UK that
still appears to be founded on debt and a
London-centric housing market bubble
that owes much to a quantitative easing-
inspired recovery in nancial markets
and very little to improved corporate
fundamentals. UK consumers remain
horribly overleveraged but cling on thanks
to rock-bottom interest rates.With the
bene t of personally not being based in
the South-East, my sense is that conditions
outside London and the South-East remain
di cult and that the consumer remains
challenged. Improving car sales are cited
as anecdotal evidence of a reinvigorated
consumer, but one-o PPI refunds have
probably played an important role here. If
we look to the United States, where I am
even more pessimistic about the recovery,
it is noteworthy that sub-prime car loans
stand at record highs. If this is a recovery,
it is one only being enjoyed by the very
wealthiest in UK and US societies; the rest
are resorting to debt and running down
their savings just to try to keep up.
J O HAMBRO
Joint manager:
UK & General Progressive*
Echoes of pre-crisis years: growth
funded on debt and housing bubble
One-o PPI refunds
haveprobablyplayed
an important role
John Wood
All information correct as at 30 June 2014
*Closed to new funds
H
igh-yield bonds continued to achieve
positive returns as yields fell in
line with a broader rally across the bond
market. Coming into 2014, it was a widely
held view that government yields in the
major developed markets would be pushed
higher by improving economic growth
and the anticipation of higher interest
rates.This has not happened.While data
on growth has been generally positive, it
is the weakness of in ation that has been a
surprise. Headline in ation readings well
below 2% have been recorded in the US
and the UK, while in the eurozone the rate
fell from 0.8% in January to just 0.5% in
May, low enough to raise fears of de ation
and to prompt the European Central
Bank to act to ease monetary conditions
further. Falling interest rate expectations
have supported core government bonds,
such as gilts, and this has been echoed
across the corporate bond market. Barclays
estimates that £45.1 billion of European
high-yield bonds have been issued across
all currencies so far in 2014, up 27% on
last year’s rate.According to data from
Merrill Lynch, European high-yield bonds
achieved a total return of 1.3% (in sterling
terms) over the three months to the end of
May.The aggregate yield of the market fell
23 basis points, to 4.43%.
INVESCO PERPETUAL
Corporate Bond
Growth data has been positive but
inflation weakness was a surprise
It is theweakness
of in ation that has
been a surprise
Paul Read and Paul Causer
