M&G: Bond investors should seek secure assets

UK – Institutional bond investors look increasingly likely to suffer amid the ongoing debt crisis and should seek safety in secured assets, M&G warns.

UK – Institutional bond investors look increasingly likely to suffer amid the ongoing debt crisis and should seek safety in secured assets, M&G warns.

The firm said investors who can add value while avoiding “heroic” decisions during the current environment are those who are likely to do well.

M&G head of institutional portfolio management David Lloyd said: “Every debt crisis in history has seen someone take the pain. In the past few years it’s been the taxpayer. Now, bondholders look like being in the firing line.

“Taking the pain may not be as obvious as an outright default on risky Greek bonds. It could come from a Bank of England policy error, with resulting inflation eroding the value of UK gilts. Or, if the market starts to punish Europe’s many undercapitalised banks, as we fear it might, many corporate bonds could also fall in value.”

Lloyd said the issue has been made worse by an inability to confidently predict the future path of growth, inflation and interest rates, the three main drivers of bond markets. As a result, there is a range of equally plausible outcomes which have considerably different implications for debt market returns.

“If you take a view on these big uncertainties, what I call the heroic investment decisions, you’re essentially betting the farm on the throw of a dice,” he added. “Pension funds don’t want that.

“The best way to navigate these mammoth issues is to invest on a bottom up basis as the value opportunities emerge. One of the biggest remains in secured assets. Here we are mainly talking about top-rated mortgage backed debt, issued by European banks. In essence this is where an AAA-rated bond, backed by buildings and good tenants, provides a better return than an A-rated bond, backed by just a management promise.

“Finding the best value in bonds this complex is a painstaking research task but it’s a necessary step that investors must take to avoid the pain.”

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Chris Panteli
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