While UK bond investors will be unable to make the kind of returns markets have recorded over the past 20 years, there are still opportunities for those willing to take a more selective approach, says Schroders Jonathan Golan.
Golan – manager of the £1.1bn Schroder Sterling Corporate Bond fund – said that UK investment-grade corporate bonds have outperformed equities over the last two decades by a significant margin, due largely to the collapse in interest rates.
But with rates at or near zero, such outperformance is unlikely to be repeated in the future, he warned.
“The expected stability in interest rates imply that UK corporate bonds should hold on to their gains, but adding to them will not be so easy in future,” said Golan. “Buying the market is unlikely to get the same results over the next 20 years as it did previously.”
Sterling corporate bonds had offered plenty of value in the wake of the Covid-19 pandemic, but have now returned to more long-term norms.
“Outright yields are low and credit spreads to government bonds are roughly in line with the long-term median level,” explained the fund manager.
Indeed, rates are also unlikely to rise in the foreseeable future as they could harm individual and corporate finances while the UK economy continues to recover from the Covid-19 pandemic.
And with substantial dispersion within the sterling corporate bond market, for active managers, there are some “golden opportunities” to be found, according to Golan.
“Even as the market valuation has become less exciting in aggregate, the dispersion of the market looks interesting,” the manager said. “A wider range of prices implies a degree of mispricing and therefore scope to generate good returns, through an active approach.”