Welcome to Morningstar. I'm Holly Black. With me is Mark Preskett. He is a Portfolio Manager at
Morningstar Investment Management. Hello. Hi.
So, Mark, you look at the whole investment spectrum in your role, but I think a really
interesting area this year is fixed income and bonds. So, do you want to just talk us through
reasons you like bonds and the role you
see them playing in an investment portfolio? What's the first reason to like a bond?
Absolutely. So, I think even though we're in a very low yield environment, we've seen what's
happened in bond markets over the last six months, but they still continue to provide investors
with diversification in times of market stress and there is still, in our view, a place in portfolios
for high-quality government bonds and they fulfill that role of safe haven assets. Things like QE,
low interest rates employed by central banks has meant those yields are at all-time lows
and we would fully expect future returns to be lower than in the past, but there's
still exceptionally strong demand for these assets. Insurance companies,
pension funds, there's regulatory reasons for holding bonds. And when we look at
things like auction data and syndication data from the Bank of England, say, every issue is
significantly oversubscribed. So, for us, this safe haven status of government bonds is clear.
Okay. So, bonds are a safe haven. Why else do we like bonds?
Well, that's the government side from developed markets.
It's obviously very different when it comes to credit assets. We saw spreads and
prices fall, spread widen in March just to a very significant degree. And there's been a
rally pretty hard since then, but there are still areas of that pockets of the credit market
that are offering attractive yields. And like the equity market, there's been very significant
sector divergence within credit. And for those willing to do the work, there are some good
opportunities to lock in high single digit yields, especially from sectors like financials and some
energy related names. It's definitely clear that the corporate and high yield bonds are
not as cheap as they were. But we still like this part of the market. And that central bank support
through direct purchases is providing a backstop to any material fall in prices going forward.
So, the clue is in the name there. Fixed income – a reason to like it is the income.
So, what's one final reason that we like bonds?
So, it's slightly more nuanced this, but if you look back in history, the idea of investing for
real yields has been a very successful investment strategy, i.e., you buy a government bond that
offers yield in excess of its domestic inflation rates. So, if you think of the UK having an
inflation target of 2%, 2.5%, 2.2%, say, our yields are negative on a real yield basis. We've
got a 10-year yield of 80 basis points at the time of making this video. So, among the DM world,
there isn't really very many positive real yields out there. But if you look at elsewhere into
the emerging markets, you can actually see that there's parts of that market offering real value.
We've seen central banks in the emerging markets acting reasonably sensible in this crisis.
Typically, in a longer crisis they've sought to protect their currencies by raising rates
in the face of falling economic growth or weakening of data. This time around by and large
they did the right thing and cut rates. Their currencies did fall. But it means that a lot of
the bond markets are offering pretty good positive real yields and we are overweight emerging market,
local and hard currency, so bonds issued in the local currency and bonds issued in dollars.
The local currency market in particular because their currencies have performed pretty badly
this year, pretty poorly this year is another kicker there for the long-term investor. So,
it doesn't come without risks. It is at the riskier end of the bond market, but
emerging market does look quite attractive for us at this moment.
Mark, thank you so much for your time. For Morningstar, I'm Holly Black.