Investment-grade corporate bonds look excellent value right now.
Such bonds approach the quality of UK Government bonds, but historically pay a modest additional return to compensate investors for the additional risks of lending to a company rather than to a government.
The difference between the interest payments on government and corporate bonds is now much larger than normal, meaning that the market is pricing in significant levels of company defaults.
Many believe that this is too pessimistic.
If you are looking for a manager with the skills to navigate the prevailing conditions, Richard Woolnough of M&G manages a range of corporate-bond funds with varying mandates.
The M&G Strategic Corporate Bond fund’s mandate allows the manager the flexibility to allocate money across the spectrum of highest to lowest quality debt.
In 2008, the fund returned a creditable 3.2% compared with a loss of 9.2% for the average fund in the sector.
Mr Woolnough, commenting on the skills needed, said: “You need to be able to look across the whole gamut.
“One man can’t do this on his own. You need a team of specialists covering all sectors from government bonds to high-yield corporates.
“We have a dedicated and growing team of nearly 50 credit specialists to help with this task.”
Running a bond fund is not necessarily about picking all the winners.
One of the most important tasks for any bond manager is to avoid the losers at all costs.
Asked how he managed to do this, Mr Woolnough said: “Ask yourself a simple question. Can I postpone purchasing those goods or services?
“If the answer is ‘yes’, such as for housing and autos, then companies in these sectors are the ones most likely to suffer.
“For consumer staples such as food, or even alcohol these days, there is less risk.”
There will undoubtedly be defaults in the current climate. Mr Woolnough believes that the UK Government needs to provide support to businesses which in more normal times would come through a downturn leaner but still intact.
Barry O’Neill is a chartered financial planner with Thomson Shepherd. He can be contacted on 01224 619215