'IG corporate bonds will remain more attractive than govvies'

Investment grade corporate bonds remain more attractive than core European government bonds, which are bound to deliver negative returns of 3-5% in the coming years, according to  Lion Trust Asset Management’s Head of Fixed Income David Roberts.

In an interview with Investment Officer, Roberts notes fixed income portfolios have become particularly sensitive to interest rates over the past decade due to a sharp increase in duration.

He says core markets continue to be manipulated by central bank intervention and, more recently, by governments. ‘This is even more true in Europe than elsewhere. It is difficult for investors to focus on economic fundamentals and parameters. The economic outlook remains very positive, and many companies will continue to enjoy monetary support.’

According to Roberts, investors do not realise the extent to which this period of strong fiscal and monetary policy will impact long-term returns. ‘Market interest rates will remain very low for at least one to two years. Especially in core countries such as Germany, France, Belgium and the Netherlands, you will see both nominal and real losses over the next three years. Since the outbreak of the crisis, these bonds have already lost 5% in real terms.’

Roberts continues: ‘Taking into account an inflation rate of around 1.5% in Europe and the fact that the interest rates of 10-year German Bunds might rise 20 to 30 basis points towards zero, you are assured of 3-5% real losses in the coming years. Elsewhere, the situation is not very different.’

The strategic weighting of his portfolio normally is:

- 50% investment grade

- 20% high yield

- 25% government bonds

- 5% cash

Currently, Roberts has 24% of his assets invested in high-yield bonds, a slight overweight. High yield does comparatively well in inflationary times as it’s the asset class most correlated to equities with relatively short duration. ‘Moreover, there’s a trade-off between high yield and inflation as inflation makes it easier for these companies to pay off their debts.’

Too local

Roberts believes that European institutional investors often are focused too much on local issuers. ‘European managers buy the expertise of European asset managers, who in turn invest too much in European markets,’ he says. ‘This depends a bit by country, but generally you get a portfolio that is not representative of the global market.’

Secondly, the duration of portfolios has risen sharply over the past decade. ‘The neutral duration of a global aggregate index is now about 7.5 years. As a result, portfolios are now much more sensitive to interest rates than they were ten years ago. Italian government bonds had a difficult moment recently when [new Italian prime minister] Draghi decided to concentrate new borrowing on the BTP market on the ultra-long end, with a duration of 50 years.’

ABOUT THE FUNDS

David Roberts joined Liontrust from Kames Capital in January 2018 to co-found the Liontrust Global Fixed Income team with Phil Milburn and Donald Phillips. Roberts is co-manager of Liontrust’s Strategic Bond and Absolute Return Bond strategies. He was previously head of Fixed Income at Kames Capital.

The team now has a track record of almost three years at Liontrust. It adopts a defensive strategy, not investing in convertible bonds, equities, loans, private placements, subordinated financial bonds and options. It does not take active positions in currencies. 

The returns of the fund with the longest track record, Liontrust GF Strategic Bond, are 8.83% after costs at one year annualised and 3.13% after costs at three years annualised.

The Strategic Bond fund has over 815 million euros under management in two compartments (Liontrust Strategic Bond and Liontrust GF Strategic Bond), Liontrust GF High Yield Fund 139 million and Liontrust GF Absolute Return Bond Fund over 161 million.