Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Daniel Lockyer, manager of the iimia Income Fund
Fixed-interest funds have traditionally been viewed as low risk. But they could easily have been regarded as high risk a couple of years ago – if one simply defined risk as the possibility of losing money. The average UK corporate bond fund has lost money, even after the reinvestment of the coupon, over the past year (–1.2%) and 18 months (–0.5%) and has only just made a positive return over two years (0.3%).
If you believe inflationary pressures are subsiding and interest rates are set to fall, now might be a good opportunity to get back into the asset class after the recent disappointment, given headline yields are at much more attractive levels today than two years ago. But before diving into the usual open-ended corporate bond fund, it might be worth considering the closed-ended sector, where some interesting new funds have been launched in the past 12 months.
The CQS Oil Rig Finance (RIG) fund invests in bonds issued by the oil-rig infrastructure industry to finance the building and modification of offshore rigs and related equipment. After decades of underinvestment in the industry due to low energy prices, the current fleet is in dire need of refurbishment. Moreover, because most of the easy oil has already been found, a new generation of rigs must be built to explore far-reaching and deeper oil fields. These bonds offer a yield of around 8% and have scope for capital growth as demand for the bonds increases.
One key attraction of the newly launched Henderson Diversified Income (HDIV) fund, other than John Pattullo’s management skills, is the exposure to secured loans. This part of the fixed-interest sector offers a high yield with little movement in the capital element. The loans rank higher than corporate bonds and are secured against the assets of the issuing company. The remainder of the portfolio (around 50%) will invest throughout the rest of the fixed-interest asset class to boost the potential for capital return. The fund targets a consistent dividend yield of LIBOR plus 1.25%, currently in excess of 7%, and emphasises capital preservation. Fortunately, the fund was launched just ahead of the credit crisis and so had plenty of cash to invest at more attractive prices than had originally been expected.
FRM Credit Alpha (FCAP) is a fund of hedge funds that invests solely in the credit markets. It is difficult for many people to access hedge funds directly and the best way can be through a fund. Hedge funds are usually associated with equity markets, but there is just as great an opportunity within fixed-interest markets. Although funds of hedge funds do add an extra layer of charges, this can often be outweighed by the prospect of extra returns. For example, the US sub-prime mortgage market, which was the catalyst for the sell off in markets during the summer, was highlighted as an area to avoid. But FRM, through its underlying managers, was able to go short (sell bonds without owning them) and benefit from the weakness. Indeed, the value of the portfolio actually rose during the difficult third quarter by more than 2%. The fund yields just 3.5%, but should be able to make consistent returns each year regardless of market direction, which makes it an excellent diversifier for both bond and equity portfolios.
The funds Daniel Lockyer likes
Fund, 12mth high, 12mth low, Now
CQS Oil Rig Finance, 107p, 100p, 102.25p
Henderson Diversified, 104p, 100p, 100.9p
FRM Credit Alpha, 108.5p, 101.5p, 107.5p