Investors pile into bonds

Hello, I’m Emma Dunkley covering for Harriet Agnew this week.

Investors are piling back into bonds following a “cataclysmic” period for the asset class.

Bond prices tumbled last year after steep increases in US interest rates. But yields on Treasury notes are now higher than they have been for most of the past decade, providing an attractive income for asset managers.

With the Federal Reserve nearing the end of its tightening cycle, institutional and retail investors are heading back into fixed income, as Madison Derbyshire and Harriet Agnew report.

T Rowe Price, which oversees more than $1tn in assets, said bonds are finally “exciting again, for the first time in a long time”.

Sebastien Page, chief investment officer of T Rowe Price global multi-asset strategy, said: “It’s very simple — yields are much higher than they were and it just means you have higher expected returns.”

More than $100bn has poured into actively managed fixed income funds in the US during the first four months of this year, according to data site Morningstar. This follows outflows of more than $332bn last year.

Investors say the rotation back into bonds is sizeable. “We’re seeing enormous moves into fixed income,” said Yie-Hsin Hung, the chief executive of State Street Global Advisors. “It feels like the beginning stages of what happened in equities, moving much more into passive.”

It is not just US investors who are returning to the asset class. In the UK, retail investors have also flocked to gilts and fixed income products, according to execution-only platform AJ Bell.

Michael Summersgill, chief executive of the investment site, said that customers on the platform had increased their investments in UK government bonds by a “meaningful” amount.

“I’ve been here for 16 years, I have not seen gilts and fixed-income products being bought with anything like the volume that we’ve seen,” he said.

UK government bond yields, which move inversely to prices, rose on Wednesday to the highest level since former prime minister Liz Truss’s “mini” Budget, after inflation was higher than expected. Gilt yields jumped again on Thursday, as traders bet interest rates would peak at 5.5 per cent by the end of the year.

UK plans pension changes to boost business

Pension fund reform is on the cards in the UK, as the government attempts to unlock billions of pounds to support domestic businesses.

Ministers are considering plans to reform the government-backed Pension Protection Fund so that it can take on struggling companies’ defined benefit pension plans, in addition to schemes where the employer fails.

The aim of the proposals, which are being examined by chancellor Jeremy Hunt, is to free-up billions of pounds held in defined benefit schemes which can be funnelled into UK start-ups and fast-growing businesses.

Steve Webb, partner at consultancy LCP, said if struggling schemes could be moved to the PPF without failing first, it could lead to “tens of billions of assets” being transferred.

As Josephine Cumbo, George Parker, and Chris Flood report, the initiative is one of a range being considered by the government to support investment into UK businesses.

Pension reform has come under the spotlight as research by Ondra Partners shows holdings of UK-listed companies by British pension and insurance funds have plunged from about half of their portfolios to 4 per cent over the past two decades.

The Tony Blair Institute, a think-tank, has suggested pooling thousands of public and private sector pension plans into giant “GB superfunds” of up to £500bn in size, as another way to unleash billions of pounds for UK business growth.

The proposals come as a string of companies have shunned the London Stock Exchange in favour of New York, owing to a range of factors, from potentially higher valuations in the US to bigger executive pay packets.

Analysis by Patrick Mathurin and Anne-Sylvaine Chassany shows London is the European stock exchange most at risk of losing large listings to the US.

The FT examined 111 European companies, each with a market capitalisation of at least $10bn and each with their shares trading at a discount to US rivals, to see which groups have the strongest case for shifting to New York. London-listed groups represented half of the top 10 and 18 of the top 50.

London-listed Irish construction group CRH, which will put its decision to move its primary listing to New York to shareholders on June 8, tops the league table. It is followed by cigarette maker British American Tobacco and drugmaker GSK. Dutch medical devices group Philips ranks fifth.

Chart of the week

Shares in the world’s largest semiconductor makers surged after Nvidia’s bumper earnings. The Philadelphia Semiconductor Index this week rose to its highest level in 14 months, writes George Steer in London.

Nvidia’s market value soared by more than $184bn this week to near $1tn after it projected $11bn worth of sales over the next three months, nearly $4bn ahead of consensus expectations. “This is the largest raise we have seen in our coverage”, said analysts at Bank of America.

Companies such as AMD, Marvell Technology and Applied Materials have also soared this year, up around 95 per cent, 70 per cent and 40 per cent respectively.

“Nvidia is the clear leader, but two-thirds of [the Philadelphia Semiconductor Index’s] components are outperforming the S&P 500 year-to-date and more than a third are up triple the rate of the S&P 500,” noted analysts at Bespoke Investment Group in New York.

Across various industries there is “unsatiated demand” for Nvidia’s latest H100 data centre chips, said Abhinav Davuluri, equity strategist at Morningstar.

However, Mark Haefele, chief investment officer at UBS Global Wealth Management, warned that the rally in AI-related companies in particular “has raised concerns that this segment is now in a bubble.”

Five unmissable stories this week

Pete Briger, co-founder of Fortress Investment Group, believes that a sharp credit contraction caused by the banking crisis and rising interest rates will fuel a wave of defaults. This will create the best opportunity for distressed asset investors since 2008, he said.

Kensington and Chelsea council’s pension fund is pouring hundreds of millions of pounds into commercial property in a controversial bet just as many global retirement funds offload or write down their real estate holdings.

GAM’s senior fund managers made a rare intervention by publicly supporting the proposed sale of the Swiss group to UK-listed Liontrust. In an open letter to GAM’s board, fund managers at the Swiss company said that there was a “cultural alignment between GAM and Liontrust”.

Hargreaves Lansdown, the UK’s largest execution-only investment site, sounded the alarm over Lindsell Train’s risk management. Hargreaves warned that the fund group was not “sufficiently” assessing its investment decisions and found shortcomings in the “capabilities and resource”.

Investment advisers are job-hopping in the US, sparked by a series of mergers and the recent banking turmoil. More than 26,000 advisers switched firms in 2022, according to Cerulli Associates, representing 9.2 per cent of the US total. Industry executives say they expect the number to grow this year.

And finally

Iraqi artist Dia al-Azzawi is showcasing his work at the Ashmolean Museum in Oxford. His art includes vibrant canvasses and “dafatir”, a combination of painting and text, among other forms. The exhibition runs until June 11.

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