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In today’s challenging economic environment investors looking to minimise credit risk may wish to consider the City Financial Gilt Fund or the City Financial Strategic Global Bond Fund. – Andrew Williams, Chief Executive, City Financial

Lately, it seems that the financial press has been taking a closer look at corporate bonds, and more often than not coming to the conclusion that they have become so inexpensive as to represent a smart asset class for allocation. We disagree.

The holiday season is barely upon us and already retailers are offering shoppers sizeable discounts. Whether these are termed promotions, sales, or special events, they amount to the same thing, a desperate plea on the part of struggling companies to dump inventory in exchange for cash now, with minimal concern to how this will diminish their brand. Has the turmoil plaguing the financial services sector finally spilled over into the real economy?

Is this ‘knock-on effect,’ of which the public has been warned by politicians keen to rally support for unpopular bailout schemes, now widely being felt?

Sales figures suggest yes. In fact, the economic stress that first emerged in the world of high finance during late-summer 2007 has caused a marked slowdown in the retail sector, with many experts expecting worse to come. Unfortunately, however, this is old news. Not even the most detached investor could have failed to hear of the massive declines that equities markets have experienced recently. By any measure available, valuations are cheap. Is this not then the time to buy?

The short-term memory of some is astounding. Just a short while ago when Lehman Brothers collapsed many expected that the recovery rate (the percentage of his stake an investor could expect to recover from a bankrupt entity) for investors would be approximately ten cents on the dollar. More recently, as Councils across the UK have found out, less may eventually emerge from the failed Icelandic banks, and even then probably after years of complex international legal wrangling.

Is this the best case for corporate bonds? It’s not good enough.

There are complicated cyclical considerations to take into account. On the global financial landscape a process of debt liquidation is under way that resembles a turning point heralding weaker global growth. The commodities markets have already taken this into account, as evidenced by the steep decline since July seen in the price of oil. This liquidation will further increase the cost of the debt burden that companies bear. Combined with declining revenues and exacerbated by deflation, this is a recipe for corporate debt default on a massive scale.

Investors seeking safety beyond that offered by equities thinking of wading into the corporate bond field need to have deep faith in the ability of their manager to select credits. Instead, they may wish to consider the almost complete lack of credit risk offered by funds invested in AAA-rated government bonds.

Best regards,

Ian Williams, Fund Manager - Strategic Gilt Fund