"There is a paradox going on at the moment between what gilts and corporate bonds are telling us. Yields on gilts are lower right now than when Lehman Brothers went under," said Trustnet Alpha Manager Anderson.
"Once adjusted for CPI, gilts generally are losing the investors money, so you have to believe in deflation if you're buying them. Corporate bonds look stronger, though," he added.
Despite comments from eminent investor Warren Buffett earlier this month querying the rationale for buying bonds, Anderson says there is potential for capital gain in the corporate bond market. He runs Gartmore's Corporate Bond and Fixed Interest funds in the Sterling Corporate Bond sectors, and the UK Long Dated Gilt fund in the UK Gilt sector.
Anderson says he is buying high yield bonds from businesses - including those owned by private equity groups - which tend to have considerable debt to pay off. Examples include Virgin Media, Matalan, ITV, Thomas Cook and William Hill. However, these are not risky investments, the manager says, as they are cash generative companies. Further, the number of firms defaulting on their loans has plummeted since the economic recovery.
Performance of funds vs IMA Sterling Corporate Bond sector over 3-yrs
Source: Financial Express Analytics
The Corporate Bond fund has returned twice as much as the sector average over a three year period, while the Fixed Interest fund made a loss of 9.2 per cent in the three years to 15 October.
Financial Express data shows the IMA Sterling Corporate Bond sector has outperformed the IMA UK Gilt sector in the past year, but that gilts fared better than corporates over three years, reflecting the recent slump in gilt yields.
Performance of IMA Sterling Corporate Bond sector vs IMA UK Gilt sector over 1-yr
Source: Financial Express Analytics
Other data shows that there are ten IMA sectorised fixed interest funds with double-digit weightings towards high yield bonds, ranging from a 14.1 per cent weighting of the Barclays Income Plus Portfolio up to a 95.5 per cent weighting for the AXA Global High Income fund.
Looking at the risk/reward performance of those funds that have at least a year's worth of data behind them suggests there is a spread of returns for investors to consider. Only one has taken on more risk and underperformed the return of the Sterling Corporate Bond sector average - the AXA Sterling Corporate Bond. Others have taken on more risk, but have outperformed over the 12 months to the end of September.
Sterling High Yield vs Sterling Corporate Bond
Source: Financial Express Analytics