Investec sees rush to bond funds

Investec Asset Management reports Hong Kong retail investors are snapping up its fixed-income funds in the wake of sagging global economies.

It began marketing a US dollar high-yield bond fund earlier this year and has seen demand in Hong Kong rise $1 million per week for the past two months, says Stewart Aldcroft, managing director.

“It is selling better than any of our equities funds,” he says. “It is suitable for this falling interest-rate environment.” The same goes for euro and other dollar-denominated fixed-income products, he adds.

Paul Griffiths, head of fixed income in London, says the likely scenario in the United States is for the Federal Reserve Bank to cut interest rates by another 50 basis points, probably half next week and half in the near future. After that, he expects rates to remain low, at 3.5%, for a year or so.

The risks are either these efforts prove futile as American consumers stop spending, or that they underestimate inflation. Either result would mean recession. But he thinks the inflation threat unlikely, attributing recent price rises to a peaking spike in oil and gas markets.

“This is a supportive environment for fixed-income assets,” Griffiths says. The rate cuts mean current bondholders benefit from a capital gain as bond prices rise. They also enjoy gains on tightening yields.

He is pitching the high-yield fund because clever management can give investors an equities-like upside on a corporate credit level, while defending them from volatile stock prices. His portfolio is currently invested 50% in corporate high-yield paper, 40% in emerging market sovereign debt and 10% in global investment grade corporate paper and US Treasuries. Any signs of another emerging markets debt crisis or tightening credit spreads, and the fund will flee to quality, he says.