John Pattullo, Co-Fund Manager of Henderson Diversified Income Trust, explains why the team is increasing the portfolio's exposure to government debt and is taking a cautious approach to credit markets in 2019, with an eye on improving valuations in the corproate bond market later in the year.
Bear market: A financial market in which the prices of securities are falling. A generally accepted definition is a fall of 20% or more in an index over at least a two-month period. The opposite of a bull market.
Bond: A debt security issued by a company or a government, used as a way of raising money. The investor buying the bond is effectively lending money to the issuer of the bond. Bonds offer a return to investors in the form of fixed periodic payments, and the eventual return at maturity of the original money invested – the par value. Because of their fixed periodic interest payments, they are also often called fixed income instruments.
Credit: Refers to bonds within fixed income markets where the borrower is not a sovereign or government entity. Typically, the borrower will be a company or an individual, and the borrowings will be in the form of bonds, loans or other fixed interest asset classes.
Derivative: A financial instrument for which the price is derived from one or more underlying assets, such as shares, bonds, commodities or currencies. It is a contract between two parties. It does not imply any ownership of the underlying asset(s). Instead, it allows investors to take advantage of price movements in the asset(s). The main types of derivatives are futures and options.
Default: The failure of a debtor (such as a bond issuer) to pay interest or to return an original amount loaned when due.
Gearing: A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes
Gilt: British government bonds sold by the Bank of England, done to finance the British national debt.
High yield bond: A bond that has a lower credit rating than an investment grade bond. Sometimes known as a sub-investment grade bond. These bonds carry a higher risk of the issuer defaulting on their payments, so they are typically issued with a higher coupon to compensate for the additional risk.
Late cycle: Asset performance is often driven largely by cyclical factors tied to the state of the economy. Economies and markets are cyclical and the cycles can last from a few years to nearly a decade. Generally speaking, early cycle is when the economy transitions from recession to recovery; mid-cycle is when recovery picks up speed while in the late cycle growth slows, wages start to rise and inflation begins to pick up. At this stage, investors become invariably bullish believing that prices will continue to rise.
Spreads: The difference in the yield of a corporate bond over that of an equivalent government bond.
Sovereign bonds: Bonds issued by governments and can be either local-currency-denominated or denominated in a foreign currency. Sovereign debt can also refer to the total of a country's government debt.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment.
Yield: The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.