If you haven’t got the stomach for equities following the recent market sell-off, it might be worth considering bonds. We’ve spotted an attractive bond fund from TwentyFour which is a well-respected asset manager and a proven expert at finding the best opportunities in the fixed income market.

The spread of coronavirus is causing disruption to global trade and leading to economists revising down growth expectations. A reliable beneficiary of falling growth or even recession are government bonds, whose prices tend to rise (as yields fall) during periods of subdued or negative growth.

One corollary of the emerging crisis is that investors are betting it will prompt a quick policy response from the Federal Reserve by cutting interest rates and that’s already in motion.

According to Bloomberg data, the market has already discounted three or four interest rate cuts by December 2020, which means that investors owning government bonds may have already reaped the lion’s share of the price gains from any financial stimulus.

Chris Bowie, fund manager at TwentyFour Asset Management tells Shares that historically the economy has bounced back strongly in a so-called v-shaped recovery from previous epidemics such as SARS. If this were to happen again, owning the safest assets wouldn’t be the best strategy.

For these reasons we believe a better approach is to focus on strategic bond funds which have flexibility to take advantage of market conditions as they change over time.

MI TwentyFour Dynamic Bond Fund (B57GX40) is one such fund with an excellent track record, delivering a better return than its benchmark and peers over the last three and five years with average annual returns of 4.5% and 3.8% respectively.

The fund, which is team managed, has been reducing exposure to riskier assets over the last year and reinvesting the proceeds into government bonds, specifically US Treasuries, which represent 30% of its £2.2bn portfolio.

Having benefited from exposure to US Treasuries and given that lower interest rates have already been discounted, the team is now looking to selectively increase exposure to corporate credit. That means buying debt issued by large investment-grade companies.

Because they are riskier, corporate bonds pay a higher rate of interest than government bonds, and this is referred to as the ‘spread’. Over the last month, spreads have widened out by around 20%, making them more attractive.

However, the team believes that more economic data is needed to gauge the true impact from the coronavirus and accordingly will aim to keep the volatility of the portfolio low by restricting the fund’s corporate debt exposure to shorter dated bonds.

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