Old Mutual Corporate Bond fund manager Stephen Snowden has warned the value in many investment grade credit funds has been completely exhausted despite the overall market remaining at distressed levels.
Snowden, the top-performing manager in the IMA £ Corporate Bond sector last year, says the majority of funds are significantly overweight sectors such as telecoms and pharmaceuticals, which he believes are back at bull market valuations.
The manager says while credit markets remain at historically wide spreads, the majority of any further gains will primarily be in cyclical and consumer names.
“We are still at incredibly distressed levels for the market as a whole. But the index hides many moving parts, one of which is the common sense corporate bond, which is ferociously overvalued,” he says.
“All you need to do is look at the top 10 holdings of most popular corporate bond funds and see things like France Telecom, GlaxoSmithKline, Unilever, British Gas – they will all be there.
“For those funds, I see no value whatsoever. The common sense corporate bond is completely exhausted, and has been for six months.
“However, the rest of the market is incredibly cheap. If you can pretend the last two years did not exist, credit spreads today are wider than at any point during the Asian crisis, the TMT crisis, September 11 or the Enron and Worldcom collapses.”
Old Mutual Corporate Bond – which climbed 33.1% in 2009 – is continuing to outperform the sector this year, up 4.9% against an average 2% rise.
The manager says his decision to not to sell out of financial debt during the credit crisis, despite facing significant internal and external pressure, continues to be vindicated.
“There are different views on the banking sector and many people still do not support bank bonds,” Snowden adds.
“We have 30% of our portfolio in the sector. We still think there is substantial room for recovery there. The same is true of the insurance sector.”
