IPE Institutional Investment: What is your general outlook for fixed income markets, will rates stay that low over the next years?
Woolnough: With yields on government bonds close to record lows the stellar returns of late 2008 are unlikely to be repeated. A more bullish case can be made for investment grade corporate bonds, where we could easily see double digit returns over the next 18 months. We are in a low inflation, low interest rate environment that is likely to last for quite some time. The alternative measures the European Central Bank is proposing in an effort to flood the market with liquidity and limit the damage caused by the credit crunch may or may not work. If they don’t, further alternative measures will be attempted and interest rates will have to stay very low for two or three years.

IPE Institutional Investment: Corporate Bonds are currently “pick of the year” for many institutionals. How long will the party last?
Woolnough: In our view, the investment case for corporate bond funds remains highly attractive. Even against the background of a deep recession, we believe the rates of default expected by the market are highly unlikely. This makes corporate bonds very compelling at the moment.

IPE Institutional Investment: Which scenario for the economy is currently priced in the bond spreads?
Woolnough: Corporate bond spreads are discounting an Armageddon-type scenario, with an unprecedented number of defaults among investment grade companies. We think it is very unlikely that one in three investment grade companies will go bankrupt in the next five years. By lending to big, low-risk companies, investors can receive yields upwards of 6% a year, with the prospect of double-digit yields if they want to take on a bit more risk. This makes corporate bonds very attractive as the income on bank savings collapses.

IPE Institutional Investment: Do you think we will see a major correction in the corporate bond markets when defaults start to rise?
Woolnough: Current pricing suggests around a third of all investment grade credit would need to default over the next five years before investors would receive a return lower than that available from government bonds.

IPE Institutional Investment: Could you briefly describe the title selection by M&G for corporates?
Woolnough: Credit selection is through a combination of top-down and bottom-up strategies. Our top-down approach means that our fixed interest fund managers form a macroeconomic overview, incorporating views on economic growth, inflation and the yield curve. They look at market expectations and compare it with the economic health of regions, sectors and individual stocks. The investment process proceeds when they find there is a mismatch between economic indicators, bond prices and events in reality. The next stage is to choose the asset classes that offer the best value, whether this means investing in government bonds, investment grade bonds or high yield. Thereafter the fund managers will seek the input of the credit analysts when they make their decisions as to sector and individual credit selection. Currently there are over 50 fixed interest analysts at M&G - one of the biggest fixed income teams in Europe. 

IPE Institutional Investment: Which sectors/industries and which credit ratings do you prefer?
Woolnough: At the moment we favour investment grade issues, specifically BBB rated bonds. This rating category contains large, stable companies whose bonds offer very attractive yields compared with cash and government bonds.

IPE Institutional Investment: Is duration currently a value add?
Woolnough: With interest rates now very low, we believe the biggest driver of corporate bond returns will now come from credit risk, rather than duration positioning.

IPE Institutional Investment: Herr Buschmann, wo sehen Sie konkret im Creditbereich, die Vorteile von Fondsengagements gegenüber einzelnen Direktinvestments?
Buschmann: Direktinvestments bei Anleihen, besonders Unternehmensanleihen, sind riskant, auch wenn das viele Anleger bisher oft unterschätzt haben. Sie erfordern aufwändige Recherchen vor allem zur Kreditwürdigkeit des Anleihenschuldners. Gerade Anleihengläubiger sollten wissen, an welcher Stelle in der Rangfolge sie im Falle einer Insolvenz stehen. Bei der UBS stehen beispielsweise einer Aktie rund 40.000 ausstehende Anleihen gegenüber, die sich in rechtlicher Ausgestaltung, Währung, Emissionsort und Wertigkeit unterscheiden. Hier genau die richtige Anleihe herauszufiltern ist für einen Endanleger eigentlich nicht machbar. Dazu brauch man Profis, die sich tagtäglich mit der Materie beschäftigen. Dagegen bieten Anleihenfonds eine breite Risikostreuung und niedrige Einstiegspreise sowie ein qualitativ hochwertiges Management.

IPE Institutional Investment: Vielen Dank für diese Auskünfte.