Steady Eddie bond fund offers returns as other assets retreat

FUND manager Mark Nash believes stock markets will remain volatile in the coming weeks – as the problems that led to the collapse of Silicon Valley Bank and the takeover of Credit Suisse by Swiss rival UBS continue to impact on banks far and wide.

Nash is part of a 29-strong fixed income team at fund management group Jupiter that manages bond assets of £9.5billion. He believes there is a risk of contagion as other banks – especially smaller ones – get drawn into the crisis as the value of their assets fall, lending dries up and depositors run for the hills.

Most at risk, he believes, are some regional banks in the United States which he says have enjoyed 15 years of access to cheap money to fund their lending. But that era has now come to an abrupt end on the back of higher interest rates, stopping new lending in its tracks.

Nash’s belief is that this contagion could spread beyond banking, causing investors to pile out of illiquid assets such as commercial property funds – with some managers of these funds having no choice but to pull up the drawbridge and prevent withdrawals.

All rather scary – and Nash believes the economic consequences will not be pretty in the short-term.

Yet he is not full of doom and gloom. He believes the shake-out in the banking sector is a sign that the war on inflation could soon be won – and that the sharp rise in interest rates which has taken place since late 2021 is coming to an end.

When this happens – falls in both interest rates and inflation – Nash believes it will put the world economy on a stronger footing and mark the beginning of a rally for assets such as equities and, in particular, bonds.

‘For the past 18 months, higher inflation and raised interest rates have been bad for both equities and bonds,’ he says. ‘But now is not a bad time to be buying bonds. Investors should benefit as interest rates come down and bond prices rise.’ When bond prices increase, fund managers can make capital gains – to add to the income which the bonds promise to pay. Together with James Novotny and Huw Davies, Nash runs Jupiter Strategic Absolute Return Bond, a £620million fund that strives to generate a positive return for investors from an 87strong portfolio primarily comprising government bonds. These bonds, representing 86 per cent of the portfolio, are underpinned by the governments of the US, the UK, Germany and New Zealand.

The fund has largely lived up to its name, delivering positive returns in six of the past eight full calendar years. Since launch in spring 2014, the fund has produced an overall return of 17 per cent. As the graph shows, its performance has been Steady Eddie-like when compared with the more volatile FTSE All-Share Index.

As a result, it was not impacted adversely by the market fallout from the 2020 lockdown of the world economy. Nor did its price come under pressure last November when markets were spooked over the attempt by then Prime Minister Liz Truss, left, to push through unfunded tax cuts. Nash says the fund is popular with big financial institutions such as pension funds – as well as family offices managing money on behalf of high net worth individuals.

‘It’s a great portfolio diversifier,’ he adds, ‘and it generates returns when other assets are in retreat.’

Annual charges total 0.65 per cent and the fund yields an annual income equivalent to 2.9 per cent.