Saj Vaid, lead manager of the Royal London Corporate Bond Fund believes that the resilience of credit markets since the start of the year would suggest that the re-pricing during the second half of last year went a long way to pricing in uncertainties, especially with regards to Europe.
Saj comments: "The 'solution' to Greece Portugal and Ireland and the fact that Spain has been able to differentiate itself from the weaker peripherals does mean that the European sovereign issue is back to becoming more idiosyncratic than systemic. Against this backdrop and given the continued strength in the corporate sector, we expect investment grade credit to at least strengthen to the levels seen in April last year and finish the year around 125 basis points over gilts.
"One feature of this year has been the opening up of the covered bond market. This is an area that we believe is clearly mispriced and we expect the fund weighting to grow to at least 10% over the next six months. This area of the market could tighten by at least 50 basis points over next 12 months."
The Royal London Corporate Bond Fund performed strongly in 2010 ranking in the top quartile of the IMA Sterling Corporate Bond sector and returning 10.5% (more than 3% ahead of the sector average) and this robust performance has continued so far this year.
Saj has decreased exposure to high yield as he does not feel the need to chase yield. The Fund continues to benefit from its bias towards secured assets combined with exposure to financials and he expects to be able to benefit from ongoing spread compression over the next year. In summary, Saj believes that current market conditions offer active managers plenty of opportunities, while the size of the Fund and nimble management style afford a clear advantage.
Royal London Corporate Bond Fund, AAA rated by OBSR
Launch date: 01/03/1999
Fund size: £358.24m
Distribution Yield: 6.38%
Underlying Yield: 5.44%
Duration: 6.9 years
Benchmark Duration: 7.3 years
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