We are currently living in an age of some of the lowest yield, growth and inflation, said Spreadbury, portfolio manager of Fidelity’s Strategic Bond Fund and co-manager of its Moneybuilder Income Fund.
“Global debt as a percentage of GDP is higher than ever before,” he indicated. Globally speaking, sluggish growth coupled with subdued inflation and an excess of saving from an increasingly ageing population are the primary drivers of the record low yields we are witnessing, stated Spreadbury. Meanwhile, “the demand for yield is palpable,” he noted.
Ben Seager-Scott, director of investment strategy at Tilney Bestinvest, noted one particularly concerning aspect of the current situation on the bond market - bonds’ correlation to equities.
“During market crises, high yield bonds can start performing like equities,” he said. “There’s a risk they will fall together just as easily as they rise together.” For that reason, Seager-Scott said he has been close to zero in high yield recently and has been relatively light on corporate bonds, which he explained are also sensitive to the current economic outlook.
Spreadbury acknowledged the perils of bond correlation to equities but argued this is more of a risk for investors chasing higher yielding bonds.
“If you want more than 2% income from bonds you have to be prepared to accept more price volatility,” Spreadbury stated.
Currently, Fidelity's £1.6bn strategic bond fund’s asset allocation is 49% investment grade credit, 27% high yield and 24% government bonds and other fixed income instruments.
In addition to active allocation, Spreadbury stressed bottom-up stock selection was another pillar of maintaining a successful fixed income strategy in a tougher economic environment.
Following Brexit, Spreadbury said his Moneybuilder Income Fund is overweight in BBB bonds and credit beta. He added that the £3.5bn fund is focused on secured corporate bonds, such as consumer staples, regulated utilities, as well as food and drink. “Even in a recession, these companies will come out the other side,” he explained.
Fidelity's Moneybuilder Income Fund remains underweight in finance and cyclical areas, he said.