Is now the time to launch a corporate bond fund?

Threadneedle’s corporate bond manager Alasdair Ross is going global for the first time in a new fund.

The Threadneedle (Lux) Global Corporate Bond Sicav launched Wednesday with the aim of returning 150 to 175 basis points gross above the Barclays Capital Global Aggregate Corporates Index, hedged in US Dollars, over rolling three-year periods.

However, many investors see the asset class as overvalued.

The S&P International Corporate Bond Index had a weighted average yield of 2.21 per cent on 19 June.

In February, the yield was 2.52 per cent and most CFA UK members surveyed at the time saw that as overvalued. Almost a fifth believed they were mispriced by greater than 5 per cent.

Ross says the demand is there because investors want global bond funds, rather than the regional exposures that Threadneedle also offers.

“Rather than having regional bond funds, people are demanding global ones,” he says.

Hargreaves Lansdown head of investment analysis Richard Troue says global bond funds are a double-edged sword.

Corporate and high yield bonds are priced so keenly that there is a potential for significant losses from a market shock, he says.

A good manager with a strong team can make the most of the greater options in a global fund to deliver good returns during a changing market, he adds.

However, Troue says it is difficult to pull off and a badly-positioned portfolio can lose money and leave a fund in a funk for quite a long time.

“One caveat is it involves a lot more skill on the part of the manager, there’s a much broader set of decisions to make and if they position the fund wrongly they can lose money and look dull for a long period of time.”

Because of that, there are few UK retail funds in the global bonds space, he adds.

Ross believes the greater universe available to a single, globally active fund gives the team a better chance of generating alpha, making it “greater than the sum of its parts”.

Credit spreads are relatively average, even though absolute yields are at historic lows, he explains.

“There’s been quite a lot of commentary about yields getting back to their 2007 levels, however the spread outlook is massively compelling.”

The fund is overweight banks as Ross believes their balance sheets are still being repaired and are likely to improve further.

Investors had “long memories” about banks, with sentiment still overly negative despite the much-cleaner balance sheets making them a better bet than the heavily-leveraged days before the credit crisis, he says.

“The quality has improved, even as the ratings have gone down.”

Cyclical companies meanwhile, are a slight underweight to neutral.