YOUR PORTFOLIO Fixed income can be presented as a challenge to investments of this nature . But Ryan Hughes , head of investment partnerships at AJ Bell , says the high degree of diversification of most underlying bond indices can mitigate the risk introduced by investing in companies carrying more debt . His other key observation supporting passive bond investing is the proliferation of choice , as product development has surged in the past few years . Thousands of vehicles now track bond indices , enabling nuanced tactical , as well as core , exposure . The first benefit of that , he claims , has been the resultant price war .
Wake-up call “ New entrants have come to market , undercutting some relatively sleepy incumbents , which has really driven down the cost of investing ,” he says . “ For example , in the UK corporate bond space , the go-to product in the market until about 18 months ago was from iShares . We think it ’ s solid and still use it in places , and it ’ s on our preferred list . “ But it was costing 20bps to track sterling corporate bonds . Invesco then launched an ETF tracking an
The case for the defence
John Mactaggart , fund analyst at FE Invest , says the argument for using passives when investing in fixed income is not as clear-cut as it is for equities .
He notes that bonds are less liquid than equities and pricing can vary significantly , meaning trading teams can exert a greater influence .
“ A strong trading team with established relationships with issuers and bankers can also gain priority access to primary issuance – deals which often come with a premium return for investors ,” he says .
He also notes some managers have track records of adding value in certain areas . For example , Royal London specialises in identifying bonds that are typically excluded from benchmarks , not rated by credit agencies and / or backed by significant collateral .
“ Adding value doesn ’ t just come down to bond selection ,” Mactaggart adds . “ Corporate bond managers can select bonds from the same company but of different maturities and issuing currencies ( with exposure to different yield curves ).”
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