The manager, who came out of retirement to head up Liontrust’s fixed income push, said emerging market sovereign bonds were favoured by him because their liquidity is much better than much of the bond universe at the moment.
At the Liontrust annual conference in London on Tuesday he said fears about bond illiquidity, particularly in investment grade corporate debt where investors might expect greater liquidity, were not overblown.
In the high yield fixed income space he said investors expect excess yield to make up for illiquidity and risk in the sector, but in the investment grade part of the asset class they are not compensated for low levels of liquidity.
Mabbutt, whose last role in fund management before Liontrust brought him out of retirement was Thames River running the Thames River High Income Fund, cited figures from a study on the liquidity of corporate bonds to support his findings.
Proof of illiquidity
The study, published in 2009 by Jack Bao, Jun Pan and Jiang Wang from Massachusetts Institute of Technology, showed the average number of bonds, their average issuance size and average trade size had all decreased between 2005 and 2008.
Specifically, the average trade size of US investment grade bonds on those trading at least 75% of business days (therefore the most liquid in the universe) in 2008 was $257,000 compared with $430,000 in 2005.
“These are incredibly small numbers if you are going to sell millions of dollars worth of bonds you are going to have to do it over several days.
“I do not think it is right to say liquidity has got a lot worse, because it has always been bad. But it has got worse,” Mabbutt said.
More up to date figures are not available, however Mabbutt’s impression is that trades will have decreased further in size and turnover will have slowed further too.
His favoured two areas of credit are emerging market corporate and sovereign debt and that is why he chose to launch a strategic bond fund in his new venture.
“Credit markets are not homogenous we need to be able to be in different segments of the market, which gives us maximum flexibility. Our position as a relatively small fund will also help.”
