Corporate bond funds proved a popular choice for investors during the first half of this year.
Despite the growing optimism of some equity fund managers, many investors found comfort investing in an asset class with lower volatility than shares.
Will the asset class still look attractive when the much-anticipated upturn in the economy arrives? Paul Read, manager of the Invesco Perpetual Corporate Bond Fund, thinks so. He said: “Valuations are still attractive. Bonds have been a strong source of income at a time when banks aren’t paying their customers to keep money there and boards of directors are being very careful with their dividend policy.”
The collapse of Lehman Brothers led to liquidity in the corporate bond market drying up almost completely late last year.
According to Mr Read, banks were “scary” last year.
He said: “It was a political mess and no one knew how it was going to end. Some bank bonds went from trading at above par right down to 20p virtually overnight. Most have since bounced back and are now trading at two or three times their low point.”
Mr Read felt the fund’s exposure to bank debt was too high last year.
However, at times this year he has felt exactly the opposite. He said: “As long as these assets continue to trade at a significant discount to par, banks will be opportunistic and further tenders could be seen. This is why it is dangerous to be short of bank exposure as bank debt has rallied strongly.”
New bond issues are still coming to market on a daily basis with many denominated in euros. A number of these deals are five to 10 times oversubscribed due to the volume of money chasing this asset class at the moment.
Mr Read admitted that, although the primary market was “a bit frothy”, it was still not bad value.
The Invesco Perpetual Corporate Bond Fund is up by 8.1% over the first half of this year, compared to a rise of 1.6% for the average fund in the sector.
Barry O’Neill is a chartered financial planner with Thomson Shepherd and can be contacted on 01224 619215.