Three strategies for Brexit-shy bond investors, July 2017

There are a whole heap of things for bond investors to worry about at the moment: the possible end of a 30-year+ bull market, raising inflation and, for UK investors at least, Brexit.

However, TwentyFour Asset Management, whose Dynamic Bond fund is on the Chelsea Selection, say UK bonds are still attractive, despite the ongoing negotiations.

According to TwentyFour's Chairman, Graeme Anderson, its specialist fixed income team feel that at this stage it is impossible to predict how negotiations will evolve. “What we can say, however, is that the market is understandably pricing in an uncertainty premium, which we feel can be taken advantage of for our investors.”

1. Find where there is value

Compared with both the US and Europe, the UK's lower quality investment grade corporate and higher quality high yield bonds are the cheapest, according to TwentyFour. And, while on the face of it the US market is more attractive in absolute yield terms, any non-dollar based investor will have to account for the cost of hedging dollar currency exposure, which is an expensive tool at the moment.

Another fund on the Core Selection that is finding opportunities in this area of investment grade bonds is Invesco Perpetual Corporate Bond. It has around 80% invested in 'AA' to 'BB' rated bonds.

2. Hold bonds near to maturity

For reasons unrelated to Brexit, TwentyFour currently have a low duration bias in their funds – in other words, many of their UK bonds will have matured before the Brexit negotiations are concluded!

Another way of accessing short-dated bonds is to invest in a fund that targets just these assets. AXA Sterling Credit Short Duration is Elite Rated by FundCalibre and worth a look.

3. Invest in sterling debt from overseas

TwentyFour's exposure to pure 'UK plc' is lower than it may seem from a superficial glance. Many of their sterling denominated bond holdings are actually overseas companies that have issued into the UK bond market. In the main, those UK companies that issue in the sterling bond market tend to be large and globally diversified, with both production and distribution on an international scale. These companies now offer additional value relative to the underlying risk.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund management teams and do not constitute financial advice.

Published on 25/07/2017