Julian Marks, who runs Nomura’s Corporate Hybrid Bond Fund, discusses with WealthBriefing the benefits of investing in corporate hybrid bonds – once considered niche. These are a growing segment of the investment-grade bond universe.

In an interview with WealthBriefing, Julian Marks, who runs the Corporate Hybrid Bond Fund at Tokyo-headquartered Nomura Asset Management highlighted that corporate hybrid bonds are performing well. “They do well in a low growth, high inflation environment, and are relatively insulated from tariffs,” he said.

Corporate hybrid bonds are subordinated debt instruments issued by non-financial, investment-grade companies, typically large, well-established corporates in sectors such as utilities, telecoms, energy and industrials. These instruments blend characteristics of both debt and equity.

Marks believes that corporate hybrid bonds are a good diversification from banks and financials. “It is hard to find sectors that are more protected from US President Donald Trump’s import tariffs than Northern European regulated utilities like National Grid, and telecoms companies like Vodafone and Orange,” he said. “The sector is well positioned in the current environment.”

“A number of issuers also have exposure to renewables and are well placed. There is a huge demand for additional energy everywhere in Europe and the US and regulators will look favourably on that,” he continued. “Issuers have been on the stock market for more than 30 years and always pay dividends to shareholders in times of stress, even during Brexit or Covid.”

“Spreads have tightened. It is a good entry point for corporate hybrid bonds and for investors to switch from high yield,” Marks added. “They are a good compliment and even a substitute for high yield and should outperform them. Investors should have an overweight allocation in their portfolios. It is something they should take notice of.”

“The market size is currently $320 billion and growing at $20 billion per year on average,” Marks continued. For context, that’s around 70 per cent of the size of the European high yield market, but made up of investment-grade issuers.

“Yields are at 7.25 per cent in sterling, with a duration 3.75 year and very attractive,” Marks said. Although yields on 30-year UK gilts rose recently to their highest level since 1998, Marks believes that corporate hybrid bonds are more attractive for long-term investors than government bonds.

Nomura’s Corporate Hybrid Bond Fund
Marks co-manages the Irish-domiciled fund, which comes under Article 8 of the EU’s Sustainable Financial Disclosure Regulation (SFDR) and recently broke through the $500 million mark. It is designed to achieve an attractive level of total return (income plus capital appreciation) through investment in corporate hybrid bonds, with utilities, energy and telecoms being the biggest sectors. Marks has 26 years of investment experience and has been with Nomura since January 2023.

“I focus on corporate hybrid bonds, nothing else, supported by the IG credit team,” he told WealthBriefing. The track record has been good. The fund has strong exposure to the US, followed by France, Germany, Canada and the UK, particularly on utilities, energy and communication.  

“We have a strong focus on northern European countries, with National Grid, BP and BT in the UK trading attractively,” Marks said. “Despite French politics, issuers like Orange are strong and defensive. We were underweight in France but have recently increased our exposure there to take advantage of the price in high quality French names.”

“We don’t invest in emerging market issuers at all. We are developed market investors and don’t want to be exposed to country risk. We prefer issuers and credit risk being at the core of the fund. We are also cautious on investing in long-dated US bonds,” he continued.

Marks believes that the outlook is positive. A lot of investors are not that familiar with corporate hybrid bonds, but when they see the issuers, the structure of bonds and attractive yields, they are often pleasantly surprised. “It’s an extremely attractive market and definitely a space worth looking at,” he said.