It’s ‘absolutely not’ all over for fixed income, says BlackRock

25 Feb 2013 | News - Comment now

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It’s ‘absolutely not’ all over for fixed income, says BlackRock

Investors in bond funds have been burned so far this year

The losses incurred by bond funds so far this year are not fixed income’s death knoll, according to a BlackRock fund manager.

Since January, the average fund in the UK Gilt sector has lost 5.4 per cent. Those in the Sterling Corporate Bond, Sterling Strategic Bond and Sterling High Yield sectors have fallen by 4.1 per cent, 3.5 per cent and 2.9 per cent respectively.

‘Is it all over for fixed income?’ asked Ian Winship, manager of the BlackRock Absolute Return Bond fund. ‘Absolutely not.’

The recent underperformance has given rise to fears of a bond bubble and Winship attributed the flow of money into bond funds over the past year to investor fear, not greed.

‘The move in fixed income has been associated not with expectations that prices will always go up,’ he explained, ‘but rather with expectations that prices can’t go down. This is clearly not the case.’

Winship continued: ‘We have to be careful and acknowledge that safe-haven markets or risk-free rates can underperform in terms of price and this is what we have witnessed in recent weeks.’

However, Winship still urged investors to consider the gamut of opportunities in the fixed-income universe. ‘To generalise about a fixed-income bubble,’ he commented, ‘does not do justice to the many alternatives across the asset class.’

Analysts at Winterflood, for example, have highlighted some of the fixed-income instruments into which both specialist and conventional funds have moved.

The New City High Yield investment trust has eschewed government and non-junk bonds entirely, and Winterflood reported that ‘the manager will rarely invest in bonds that are trading at par or above’. New City has instead focused on fixed-income securities such as preference shares and loan stocks.

The larger Scottish American Investment Company, run by Baillie Gifford, has equally turned to what Winterflood characterised as ‘esoteric, opportunistic investments’ – including Brazilian index-linked bonds – for diversification.

Related topics: Bond funds, Fixed interest, Gilts, Income investing

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