Kames Investment Grade Bond - change on the horizon?

Jonathon Curtis | Wed 15 August 2018

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• Stephen Snowden thinks bonds could struggle to make significant gains from here
• He thinks corporate bond yields could start to rise again from near-historic lows. Prices fall when yields rise
• The fund has risen 0.4% over the past year, compared to 0.0% for the average corporate bond fund

Our View

Stephen Snowden sometimes invests more adventurously than other bond fund managers. His performance can therefore be different. Sometimes it works in his favour – other times it doesn’t. Over the long term he’s shown he can add value and generate good returns for investors.

It’s been difficult to make a strong case for investing in corporate bonds in recent years. Yields are hovering around the lowest they’ve ever been. Interest rates and inflation have also remained low though, so the modest income on offer has continued to appeal to some investors. While this continues corporate bonds could remain popular. If investors begin to think interest rates and inflation will rise faster than expected, corporate bond yields will look less attractive. Prices could fall and yields rise to reflect this.

The fund doesn’t feature on the Wealth 150 list of our favourite funds across the major sectors. We think Snowden’s a good bond fund manager, but we believe there are managers who are just as good or better, running funds with lower charges.

How's the fund performed?

Since Snowden took over the fund in September 2011 he’s managed to do better than the IA Sterling Corporate Bond sector. He’s delivered a 63.6%* gain, compared with 44.8% for the sector.

The fund has the ability to use derivatives and invest in higher risk high yield bonds which adds risk. Please note charges can be taken from capital which can increase the yield but reduces the potential for capital growth.

Most of the positive performance took place in the early years of his tenure. Recent years have been more subdued. Snowden delivered a small gain of 0.4% over the past 12 months. This was more than the 0.0% figure for the IA Sterling Corporate Bond sector though. How the fund’s done in the past should not be seen as a guide to future performance.

Past performance is not a guide to the future. Source: Lipper IM* to 31/07/2018.

Kames Investment Grade Bond - performance under Stephen Snowden's tenure

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2018.

Manager's outlook

Despite the pain banks caused in the financial crisis, Snowden’s investing in their bonds again. He thinks they’ve repaired themselves since the crisis and their bonds are still cheap. On the other hand, he’s reduced investments in ‘collateralised’ bonds. This is debt secured against company assets such as property, so it’s normally considered less risky than ordinary bonds. He previously considered it an excellent investment, but now thinks it’s become too expensive.

After the financial crisis most of the world’s major central banks started pumping money into the market. They hoped this would stop economies sliding further into recession. This process is known as quantitative easing, or QE. Snowden believes QE artificially inflated bond and share prices, and has done so ever since.

But now QE is being cut back.

Snowden thinks this will make it difficult for bonds and shares to perform as well in future as they have over the past decade. Reduced QE will affect riskier investments the most, in his view. Bonds are generally considered less risky than shares, so he believes they’ll be less affected.

On the other hand, Snowden points out two-year US Treasury yields have risen to 2.5% from 1.4% a year ago. Government bond yields in other developed countries haven’t moved as much, but Snowden thinks the gap could close. When government bond yields rise, corporate bond yields have usually followed, as it’s considered riskier lending money to companies than governments.

The bond market is a complex one as so many things can affect it. That makes it difficult to predict what the market will do. Snowden thinks there’s change on the horizon for bonds. He’s keeping a sharp eye out for what happens and will carry on looking for attractive opportunities.

Please read the Key Features/ Key Investor Information in addition to the information above.

Find out more about this fund (inc. charges)