JPM STERLING CORPORATE BOND: Why this fund is buying into high quality inflation-linked bonds
Rising inflation and the possibility of higher interest rates in the UK are not economic events that most bond investors want to hear about at the start of a new year.
But the probable ending of the bull run in bonds that began in the teeth of the 2008 financial crisis does not particularly scare Andreas Michalitsianos, who runs the JP Morgan Asset Management Sterling Corporate Bond Fund.
Though he accepts bond prices will come under pressure in the months ahead, he passionately believes that bonds, especially corporate ones, will continue to play a key role in providing much needed diversification to many investors’ portfolios.
Looking ahead: Andreas Michalitsianos has bought inflation-protected bonds
‘If I had a crystal ball that told me that interest rates in the US and UK would soon be rising and that uncertainty over Brexit would remain at fever pitch, then of course I would struggle to support the case for investing in bonds,’ he says.
But nothing is ever certain and the continued search by investors for income will draw many to the steadfast credentials of fixed income.
‘Yes, fixed-income investors are confronted with a challenging environment of rising yields, but corporate bonds can present a buffer to this dynamic.’
Michalitsianos generates returns by primarily investing in a diverse portfolio of ‘investment grade’ corporate bonds from some of the UK’s biggest companies.
Nearly 90 per cent of the fund’s bonds are graded between ‘AAA’ and ‘BBB’, meaning the firms behind them are unlikely to default on payments.
Only 8 per cent of the portfolio is invested in bonds below BBB, commonly referred to as junk, where the chance of default is higher.
But Michalitsianos insists he is meticulous about the bonds he holds: ‘I am interested only in bonds where the firms behind them have the financial mettle and proven responsibility to meet commitments to bondholders.’
Though the 200-strong portfolio comprises bonds issued by some of the UK’s best known companies – such as insurer Aviva and Lloyds Banking Group – it also has a strong international flavour. It includes bonds from investment banks Citigroup and Goldman Sachs as well as electricity supplier Energias De Portugal.
Michalitsianos says such international diversification should comfort investors. He adds: ‘About 50 per cent of sterling investment grade bond issuers derive most of their revenue from outside the UK.
'This is often overlooked and should reassure those who feel the economic outlook for UK companies is bleak.’ He believes UK economic growth this year will be between 1 and 2 per cent.
Insurance policy: The manager is looking to buy quality bonds to counter rising inflation
As a counter to inflation, he has been looking to buy quality bonds where income payments rise in line with inflation. These include Northumbrian Water and property company Places for People.
He says: ‘These bonds tick a lot of boxes. I am open to more of them.’
The fund currently yields a shade over two per cent.
Over the past five years – the early period of which Michalitsianos was not in charge – it has outperformed its peers with an overall return of 40 per cent, compared with the average for the sterling corporate bond sector of 36 per cent.
Michalitsianos is not the only fund manager to paint a relatively positive picture about corporate bonds this year.
Investment house Fidelity believes credit is still a risk worth taking, with investment grade corporate bonds its ‘preferred segment’. Columbia Threadneedle says opportunities in credit markets still remain.