Schroder Corporate Bond Fund

Fund managers would be foolish to place big bets on government bonds this year as their performance is likely to flag if there is an uptick in inflation and interest rates, says Adam Cordery, manager of Schroder’s Corporate Bond fund.

Instead, Mr Cordery favours putting money into high-yield corporate bonds, and has positioned the fund accordingly.

Many of his rivals are more sceptical about the high-yield market, given the recent sell-off.

But Mr Cordery has made a bold move by investing about 17 per cent of the fund in high-yield bonds. In that market, he prefers shorter-dated bonds to longer-dated ones.

He admits he was hurt by the recent sell-off in high-yield bonds that began in the middle of May.

“Investors embarked on a flight to quality,” Mr Cordery says. “That hurt us, but it has since reversed.”

The performance of high-yield bonds has historically been closely correlated with default rates. But in spite of the asset class experiencing the lowest default rate in more than 20 years, in recent weeks investors have reduced their exposure.

The global default rate
for speculative-grade-rated bonds was 1.09 per cent in May, the same as in the previous month.

The £110.5m fund, which opened in 1999, invests mostly in corporate and convertible bonds issued by UK companies and gilts. More than half of the portfolio is in UK bonds and about
36 per cent in financial bonds.

The performance of most parts of the bond market should be rocky over the next few months, he says.

However, he believes the markets will become more stable and begin to “sort themselves out” towards the end of the year.

The big macroeconomic driver, in Mr Cordery’s view, will be the slowdown in the US economy and the pick-up in the growth of Japan and Europe. Changes in the economic cycle create volatility in the bond markets, in his view.

He thinks the measure of success for managers will be if they can earn a return better than that on cash.

Mr Cordery, who took over management of the fund
in July 2004, claims that
he takes a more aggress-
ive approach than his pre-decessor.

“The fund used to be managed like an institutional pension fund,” he says. “I’m very quick to respond to movements in the market
by adding things and
taking part in reasonably large-sized initial public offerings.”

The fund tends to be positioned more defensively than its peers.

He describes himself as an “active” long-term investor who looks at the long-term fundamentals of the economy prior to deciding what parts of the bond market to put money into.

The fund has lost 0.58 per cent in the past six months while the UK corporate bond sector lost 0.92 per cent, according to data from Standard & Poor’s.

In the past year, the fund almost matched the benchmark, posting a 2.3 per cent return against a 2.09 per cent return by the benchmark index.

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