Seeking Sterling Bond Exposure? Look Beyond the UK

10 December 2024

4 min read

Souheir Asba| Portfolio Manager—Investment Grade Credit

John Taylor| Head—European Fixed Income; Director—Global Multi-Sector

Jamie Harding, CFA| Portfolio Manager—European Credit

To improve potential returns and mitigate risks, investors should choose from the widest range of opportunities.

Recent turmoil in the UK’s water utility sector has brought home to investors the age-old warning: diversify, diversify, diversify. We find that investing with a global mindset enables much more effective portfolio diversification and far wider opportunities to add value.

Think Outside the Currency Box

We believe that sterling-based bond investors shouldn’t be swayed by home-country and currency bias and should shun unnecessary limitations on their breadth of investment choice.

The recent instance of the largest water utility in the UK—and one of the largest issuers in the sterling market—going into distress was a harsh reminder of how bias toward a single currency can hurt performance. Sticking to a narrow market with limited opportunities makes it hard for investors to avoid shocks in securities that form a large part of the index.

But a global approach has other advantages, too. Over recent decades, companies worldwide have diversified their businesses geographically and increased their exposure to overseas currencies. They’ve also diversified their debt issuance beyond their home currency. This has provided bond investors with the flexibility to implement their investment strategies across a wider range of issuers and currencies (Display). Such an approach can help both to mitigate risks and enhance returns, all while remaining fully currency hedged.

Going Global Increases Opportunities

ICE Bank of America Global Corporate Index: Percent of Issuers with Bonds in Multiple Currency Brackets

Over 60% of global investment-grade companies issue bonds in more than one currency, and over 40% issue in three or more.

Current analysis does not guarantee future results.
As of 30 September 2024
Source: Bloomberg and AllianceBernstein (AB)

Don’t Fence Yourself In

Consider the limitations of sterling versus global indices. The ICE Bank of America Sterling Investment-Grade Index contains fewer than 1,000 bonds, compared with around 19,000 in the Global Index. Sterling high yield has fewer than 100 issues, representing less than 3% of the global high-yield market. The sterling investment-grade corporate market also grew at a much slower pace than both US dollar and euro peers over the past decade, at only 37% compared with 96% and 110%, respectively.

Limiting a mandate to bonds issued solely in sterling rules out not only many opportunities to add value through security selection but also the potential for more effective diversification. Sterling bond markets are more concentrated than global equivalents: in investment-grade credit, for example, the top three sectors represent 56% of the sterling index but only 40% of the global index, which contains almost seven times as many companies. Issuer concentration is more pronounced in sterling credit too (Display).

Sticking with Sterling Locks in Concentration Risk

ICE Bank of America Investment-Grade (IG) Corporate Indices: Issuer Concentration (Percent)

The top 20 issuers account for 26.8% of the sterling IG market but only 15.9% of the global market (top 10, 16.9% vs. 10.1%).

Current analysis does not guarantee future results.
As of 30 September 2024
Source: Bloomberg and AB

Higher concentration risk means a greater probability of significant loss if a company or sector runs into difficulties. For instance, at the beginning of 2024, the biggest constituent of the UK water utility sector represented around 1% of the sterling credit market—and since the summer has been downgraded by over seven notches from investment grade to deep high yield.

Most UK sterling bond portfolios had at least some exposure to this issuer because of its size in the Sterling Index, and as it fell from investment grade their losses were increased by the lack of liquidity in the sterling high-yield market, which is valued at just £37 billion versus euro and US dollar peers at €384 billion and $1.4 trillion respectively.

Deeper markets with larger buyer bases provide a smoother transition from investment grade to high-yield status; by contrast, the small size of the Sterling Index made it much harder for such a large downgrade to be well absorbed.

Greater Diversity Means Wider Opportunity

Active fixed-income managers aim to add value by taking views on a variety of factors besides individual security selection. These include sector selection, interest-rate risk (duration), credit risk and sensitivity to market changes (beta). With a global mandate, managers have maximum flexibility to implement their views across yield curves, credit ratings and currencies, choosing from the widest possible range of securities to seek improved performance and risk outcomes.

One attraction of the sterling market is that it provides access to long-dated bonds. But that’s not a unique feature, as debt markets in the US—and increasingly the eurozone—also include a large pool of long-dated issues. Hence, mandates based on global markets can offer the same advantages as sterling, and with more flexibility (Display).

A Global Approach Creates More Flexibility

ICE Bank of America Global Corporate Index: Share of Market

Across currencies, maturities and ratings the global corporate bond index offers an enormous range of choice.

Current analysis does not guarantee future results.
As of 30 September 2024
Source: Bloomberg and AB

Such wide-ranging mandates require effective systems to research and evaluate vast numbers of securities around the world to fully take advantage of the global opportunity set.

It’s a curious anomaly: the UK has one of the more open economies in the developed world, with foreign trade representing 66% of its GDP. Yet many sterling-based fixed-income investors remain anchored solely to sterling-denominated bonds. We think it’s time for them to set sail for wider horizons, in search of better risk-adjusted returns.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Souheir Asba

Souheir Asba is a Vice President and a Portfolio Manager for Investment Grade Credit, overseeing AB’s euro investment-grade and global investment-grade credit portfolios. Asba started in the industry in 2012 and joined AB in 2024. Before AB, she worked at BlackRock as a portfolio manager in the Global Investment Grade Credit team, managing retail and institutional mandates and focusing on global sustainable accounts, both on new client pitches and existing funds. Previously, Asba worked as a European credit strategist at Bank of America, covering both investment-grade and high-yield strategies. Prior to that, she was an economist at Société Générale Corporate and Investment Banking. Asba holds an MIM in financial markets and an MBA from ESSEC Business School, France, and an MEng in geospatial engineering from the Hassania School of Public Works, Morocco. Location: London

John Taylor

John Taylor is Head of European Fixed Income and Director of Global Multi-Sector at AB. He is a senior member of the Global Fixed Income, UK and European Fixed Income, and Absolute Return portfolio-management teams. Prior to this, Taylor was responsible for the management of single-currency portfolios. He joined the firm in 1999 as a fixed-income trader and was named in Financial News’s 40 Under 40 Rising Stars in Asset Management in 2012. Taylor holds a BSc (Hons) in economics from the University of Kent. Location: London

Jamie Harding, CFA

Jamie Harding is a Vice President and Portfolio Manager for European Credit, focusing on high-yield and income strategies. He joined the firm in 2012 and assumed the role of Portfolio Manager in 2022. Harding has also worked within AB as an associate portfolio manager on the European High Yield and European Income portfolios and as a global fixed-income product specialist within business development. He holds a MSc in international economics, banking and finance from Cardiff University. Harding is a CFA charterholder. Location: London

This is a marketing communication. This information is provided by AllianceBernstein Limited, 60 London Wall, London, EC2M 5SJ. Registered in England, No. 2551144. AllianceBernstein Limited is authorised and regulated in the UK by the Financial Conduct Authority (FCA - Reference Number 147956). It is provided for informational purposes only and does not constitute investment advice or an invitation to purchase any security or other investment. The views and opinions expressed are based on our internal forecasts and should not be relied upon as an indication of future market performance. The value of investments in any of the Funds can go down as well as up and investors may not get back the full amount invested. Past performance does not guarantee future results. This information is directed at Professional Clients only and is not intended for public use.

Seeking Sterling Bond Exposure? Look Beyond the UK

Think Outside the Currency Box

Don’t Fence Yourself In

Greater Diversity Means Wider Opportunity

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