As one delegate asked Skandberg and the other five attending fund managers where they still find value within fixed income, the two fixed income managers at the conference said they like high yield bonds most at the moment.
Missing the mark?
“The corporate cycle is very supportive of high yield, with the cost of financing being low, and companies still have a lot of cash on their balance sheets,” said Simon Foster, who manages a
flexible fixed income strategy for UBS Asset Management.
However, Skandberg (pictured left) repudiated his line of argument, arguing that no bonds can actually compete with dividend-paying stocks in terms of return.“Dividend yields in two thirds of corporates exceed their own corporate bond yield, so you get that dividend with all the growth opportunities that come with equities for free,” he argued. “Looking at the bigger picture, someone is missing the point perhaps a little bit”, Skandberg referred to the previous speaker.
Kames Capital’s fixed income specialist. Colin Finlayson (pictured right) then decided it was time to defend Foster and form a united bond front, saying it is not fair to compare dividend-paying stocks to bonds with a defined maturity. “You’d better compare dividend yields with perpetual bond yields, because equities are a perpetual instrument,” the Scotsman argued. “So if you compare dividend yields with 10-year bond yields you don’t compare like with like. You have to look at perpetual yields and if you do that, dividend yields look much less compelling.”
Finlayson indeed has a point, in the sense that perpetual bonds behave more like equities (see graph below). But they are not really an alternative to dividend stocks as they are illiquid, and therefore very susceptible to market shocks. The range of perpetual bond options available is limited as well.
Delegates speak
As far as delegates in Barcelona are concerned, Foster’s and Finlayson’s passionate pledge for high yield risks to have fallen on deaf ears. Just 2 of the 40 delegates who filled in our asset class sentiment survey around the event said they will increase their exposure to high yield in the next 12 months, while 38% will decrease allocation.
When asked to choose between emerging market debt and high yield, both speakers picked the latter, arguing that the momentum for emerging market bond investors is fading. “We have had many years of positive fundamentals in EM, but many countries now suffer from a slowdown in economic growth. Downgrades are now even likely in Brazil and Russia,” said Foster.
But again, delegates had a radically different opinion. While high yield is particularly unloved, sentiment about emerging market debt was pretty positive. Four in 10 fund selectors said they will increase their allocation to the asset class, double the number of those wanting to sell.
Dividend-paying stocks, the kind of product Schroders’ Skandberg was promoting as an alternative to bonds, also seemed to resonate with the crowd. Again about four in ten attending fund selectors said they plan to invest more in global equity income products, while only around a quarter plan to decrease their allocation or have no exposure at all.
Click here to see a slideshow of photos taken at Expert Investor Barcelona.
Platinum members can additionally view a full breakdown of the event voting data here.
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