Fears that bond markets could become more volatile as a result of reduced liquidity levels in the asset class are continuing to dominate investor conversations in 2017.
In an update on liquidity in the UK corporate bond market in February, the Financial Conduct Authority admitted new evidence did indeed suggest that market participants may have to work harder today to complete a trade than in previous years, with the large increase in corporate bond issuance; the effects of monetary policy and QE as well as technological advances all having an impact on liquidity levels.
While liquidity is a key concern in any market condition, at Fidelity we take a number of measures to manage it in our funds.
First, we ensure that each portfolio has a bucket of highly liquid assets such as government bonds and cash. This helps to protect us from ever being a forced seller in the market and we can offset the unwanted cash drag by using highly liquid derivatives or higher beta holdings.
Second, we place huge emphasis on ensuring a robust process for transacting in the market. In practice, this means that we explore all avenues of trading, both electronic and traditional over the counter, and have specialist traders to identify the best pockets of liquidity. Part of this includes ensuring we are being sufficiently rewarded for the liquidity profile of every bond we buy. Having our traders seated side-by-side with portfolio managers helps to ensure that liquidity is front and centre of all investment decisions affecting a portfolio.
Finally, we have various oversight procedures to monitor and assess liquidity of each portfolio. This includes assessing the liquidity of bonds held by analysing their bid-offer spreads and historic trading volumes, as well as monitoring concentration risk within the portfolios. These oversight procedures act as an early warning signal on where liquidity risks are most prevalent.
For more information, please visit fidelity.co.uk/professional or call us on 0800 368 1732
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