Bond boom ‘as bad as dotcom bubble’

Bond boom ‘as bad as dotcom bubble’

Sovereign bonds are as overvalued as technology stocks were during the dotcom boom, a fund manager has warned.

By Richard Evans

3:41PM GMT 12 Mar 2013

George Godber of Miton said that when Germany issued bonds paying no return at the height of the eurozone crisis, the investment case was akin to a technology company floating with no prospect of making profits.

“When those bonds were issued I thought: ‘This is Baltimore Technologies as over again’,” he said.

Baltimore was one of the defining stocks of the technology boom. It promised to revolutionise internet security but never made a profit and its shares ended up in the “90pc Club” of those that lost almost all their value.

Mr Godber said even gilts yielding 2pc were hugely overvalued on the measure normally used to value shares.

“A 2pc yield is equivalent to a price to earnings ratio of 50,” he said. Shares typically trade at a p/e ratio of between 10 and 20, and investorsbuying shares at the higher end of the range normally expect earnings growth, which is not available on bonds.

Yields on bonds seen as safe – those issued by America, Britain, Germany and other countries outside the eurozone “periphery” – slumped to record lows when the bonds were seized on by investors desperate to preserve capital during the eurozone crisis. Bond yields move in the opposite direction to prices.

The fear is that, as the crisis recedes, bond yields are likely to return to more normal levels. Such a development would mean big capital losses for investors.

Numerous observers have said bonds are overvalued in recent months. As The Telegraph disclosed at the time, in July last year M&G, one of the leading bond fund managers, started to advise investors to stop putting money into bonds.

Workers who are approaching retirement and have “lifestyled” pension plans would be at risk, as these funds switch progressively from shares to bonds, although annuity rates should rise to compensate in part.

Not all dotcom shares failed. Lastminute.com, founded by Brent Hoberman and Martha Lane Fox, floated on the London Stock Exchange in March 2000 with a value of £571m. It was bought by rival online travel website Travelocity for £577m in 2005.

Mr Godber was speaking as Miton announced the launch of its new UK Value Opportunities fund.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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