My Asset Allocation

A question currently receiving much attention in professional circles is whether value still exists in the bond market. For someone looking to achieve an income from investing rather than simply relying on cash on deposit, is there still a case for investing in bonds? On the basis that bonds will feature in any sensibly balanced and diversified portfolio, the next relevant question to ask is where one can expect to find real value in a market that some people openly classify as boring. We are all entitled to our opinion, but let us consider the views of Charles McKenzie, manager of the DWS Corporate Bond Plus fund. He categorically disputes the assertion that bonds are boring, saying that there are benefits in being able to blend different grades of credit, and that investing in overseas investment-grade credit is still a great opportunity to increase real returns. It is a fact that many UK fixed income mandates are restricted from investing overseas, thereby leaving a straightforward arbitrage opportunity untapped. Situations where issues are more keenly priced in US dollars or euros than in sterling arise frequently. Investing overseas opens up a much larger issuer universe, as well as providing increased diversification for the investor. Fund managers can also add value from duration management and currency movement, although of course there are inherent risks should the currency go the wrong way. McKenzie is confident that there will be an increasing trend towards the use of global investment-grade bonds. Colin Harte, manager of both the Baring Global Bond and Baring International Bond funds, is equally positive on the merits of global diversification. Both trusts are invested in very high-quality credit, and in both cases it is the fund manager’s anticipation of exchange rate and interest-rate movements that are the driving factors, rather than yield considerations. The aim is to achieve “total return” rather than just income, and the running yields are relatively low due to the high quality of the instruments held in each of the funds. The running yield on the Global Bond fund is currently 2.68%, with 2.26% for the International Bond fund. In the manager’s view, the Global Bond fund is the more suitable investment for the sterling-based investor, but for international investors not reliant on converting currency back to sterling, the International Bond fund, which invests across a basket of currencies, carries certain attractions. The Isis Global Bond fund, managed by Richard Stevens, currently favours European markets in preference to the US. The current view is that the US continues to face the challenge of attracting capital against a weakening currency and a substantial current account deficit. The fund’s investment strategy is in contrast to those already mentioned, in that the investment bias is towards high-yield rather than investment-grade. As with any portfolio, diversification is key to delivering performance over the longer term. I have included three of the bond funds mentioned, as well as the highly rated Threadneedle Global Bond fund, where the inclusion of sub-investment-grade and emerging market bonds has boosted performance. All the managers mentioned have very different investment styles and strategies. I have included an equity element to the portfolio in order to provide necessary growth, as well as a rising dividend income. The portfolio has been devised to deliver a balanced income to a medium-risk investor over the longer term. Model portfolio Capital invested Isis Global Bond £10,000 Baring Global Bond £25,000 DWS Corporate Bond Plus £25,000 Threadneedle Global Bond £20,000 Rathbone Income £20,000 New Star Higher Income £20,000 Newton Higher Income £20,000 Jupiter High Income £20,000 Credit Suisse Income £20,000 Baillie Gifford Income £20,000