Invest along the yield curve: UBS
Investors looking to fixed income in the current volatile environment should look to invest along the yield curve to maximise yield in portfolios and performance from investment grade credit and emerging market bonds are looking up, according to UBS.
UBS head of fixed income and investment solutions, Anne Anderson, told Money Management that while things were looking up and there were reasons to be optimistic, Government bonds still had a role to play as they were very liquid and high quality.
During uncertain times, such as the COVID-19 pandemic, Anderson said was good to balance portfolios out with exposure to assets with a longer risk spectrum. On the fixed income side, investment grade credit and more tactical exposures to emerging markets had been performing well.
While it would be difficult to find yield with cash rates close to zero and interest rates being kept low for a long time, the Alpha Manager said investors would still make capital gains on falling bond yields during unforeseen events.
“Assets that are being repriced are definitely credit assets like bank paper, and good quality corporates,” she said.
“Right now it’s very much about focusing on industries and countries that are weathering the COVID-19 situation better. That means consumer non-discretionary issuers such as Woolworths and Apple.”
Commenting on investors piling into investment grade credit, Anderson said investment grade bonds were one of the best asset classes to be invested in over the last two months particularly because the US Federal Reserve and the European Central Bank had for the first time stepped in to buy investment grade credit including exchange-traded funds.
“That gave the market a back stop and investors a high degree of confidence to reinvest in investment grade credit. The issuance market has reopened and a lot of corporates have been able to access the market and because cash rates are so low, investors are looking for places. Investors have definitely piled into investment grade credit,” she said.
“If we see a deep recession, at the moment the risk of that has reduced, then there will be a fear that credit spreads might give back some of these gains. But at the moment sentiment is still quite positive and data is rebounding from very weak levels.
“We have increased our exposure to investment grade credit to our bond funds and balanced funds.”
According to Bank of America data, last week saw the largest investment grade bond fund inflows in 15 weeks globally at US$12.8 billion ($18.5 billion)
Anderson, an FE fundinfo named Alpha Manager, noted that the dysfunction in the market in March was short lived and that credit spreads had continued to compress and narrow as investors had greater confidence in risk and the fact that liquidity risk had dissipated.
However, Anderson said that the worst of COVID-19 in numbers was still yet to be seen as its footprints would be seen in the June quarter.
According to FE Analytics data, the two fixed income funds Anderson manages have both beat their respective sector averages but have not fully recovered losses.
The UBS Australian Bond fund returned 2.52% since the start of the year to 31 May, 2020, compared to its Australian bond sector average of 2.04%, and the UBS Diversified Fixed Income fund fund returned 2.11% compared to its Australian/global bond sector average of 1.28%.
UBS fixed income funds v sectors since start of year to 31 May 2020
Source: FE Analytics
Similarly, over the three years to 31 May, 2020, the two funds beat their respective sectors. The Australian Bond fund returned 15.1% compared to the sector average of 12.09%, and the Diversified fixed income fund returned 13.4% compared to its sector average of 10.9%.
UBS fixed income funds v sectors over three years to 31 May 2020
Source: FE Analytics
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