Ignis’ Bowie removes risk overweight from Corporate Bond Fund

Ignis Corporate Bond Fund manager Chris Bowie has removed the portfolio’s risk overweight in response to heightened fears over a hung parliament and the ongoing uncertainty in the domestic and global economy.
Bowie, who feels that gilts still represent a safe haven for GBP investors, has moved around a third of the portfolio into government securities and the safest corporate paper, including utilities E.ON, Vattenfall, RWE and EDF. The move represents a significant change of direction, as the £290m fund has been in a ‘comfortable’ overweight risk position for the past 12 months.

“If polling for the upcoming election proves to be accurate then the Conservatives will fail to secure an outright majority,” Bowie says. “Markets may take a dim view of this as the new minority or coalition government may be unlikely to take the decisive fiscal action to secure the UK’s coveted AAA status. Whatever the outcome, political risk remains high and that will generate further volatility. That is not an environment in which to be overweight risk and we have moved to a neutral position.”
Despite a top-down move away from higher yielding securities, Bowie has been selectively taking on riskier trades where he has conviction at a bottom-up level. These include positions in RBS and ABN Amro, which, although not names universally loved by bond investors, are holdings Bowie says could generate attractive returns.
“Upcoming balance sheet restructuring at both of these institutions could provide a healthy capital gain on some of the debt held within the portfolio,” he argues. “Due to the banks having heavy ongoing funding requirements, they will be keen to improve their standing with buyers of debt securities. We expect to hear in the near future from the RBS board regarding the details of this restructuring, and are comfortable holding their debt in the meantime.” 
Bowie also continues to favour the Lloyds exchanged Tier 1 debt ‘contingent capital notes’ that convert to equity after certain capital ratios are breached. “This potential transformation of debt to equity has caused some consternation among bond managers who would not want to be holders of equities,” he says. “As a result the securities have become somewhat unloved among certain investors. We believe, however, that the risk of these notes being converted to equity is overestimated by the market, and is unlikely to happen during the current economic cycle.  We therefore expect to hold these securities for some time given attractive yields and relatively secure cash flows.”