US Federal Reserve chairman Ben Bernanke’s recent announcement that quantitative easing would be tapered as early as this autumn has pushed bond yields upwards and added to the waning sentiment already prevalent in fixed income markets.
Although the red flag has already been raised about a potential bond bubble, managers such as M&G’s Richard Woolnough and Fidelity’s Ian Spreadbury have claimed there are no concerns about liquidity in their massive fixed income funds.
However, Keen and Chun, managers of the Waverton Global Bond fund, say the environment has become even worse for bond investors and that liquidity is a major concern – especially if bond yields continue to rise.
"There’s a lot of money in bonds and investors don’t realise how sensitive these securities are to moves in yield," Keen (pictured) said.
"There’s going to be a lot of pain if there’s a proper correction back to what we consider reasonable yields."
Lee says that even though their fund is small, at $104m in size, the pair are finding it very difficult to trade in the fixed income markets.
"We struggle to execute some of the trades we want right now, so I wonder what people running $20bn funds are able to do," he said.
Lee adds that larger funds are being forced to lower the quality of their holdings because they need to find somewhere to invest new money.
"Large bond funds are forced to act on new issues they don’t have conviction in because they have an ever-growing pile of money they have to invest," he explained.
In spite of this, Lee says he and Keen could continue to run the fund with the same mandate and strategy up to about $500m, but warned that if it inched closer to $1bn, they would likely have to change the way they managed money.
Keen added: "There are advantages to being small, but with $500m, we wouldn’t have to change the way we run the fund."
The Waverton Global Bond fund invests across the globe, in both government and corporate paper. Keen says its wide investment universe has given it an advantage during the period of poor liquidity and points out other managers are not so lucky.
"If you haven’t got a flexible strategy, you’re going to struggle," he said.
The majority of the Waverton fund’s asset are currently allocated to investment grade corporates.
The fund, which was launched in January 2010, has outperformed its sector and benchmark over a difficult year for bond markets, returning 6.32 per cent to investors. This compares with 5.93 per cent from the Offshore Fixed Interest Global sector average and 5.55 per cent from the US Libor 12m index.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
However, it underperformed during the rising markets between 2010 and 2012 and since launch.
Keen stresses that the fund is a very cautious strategy for investors looking to preserve capital and mitigate their losses should equity markets head south.
"We never expect to be the top-performing fund because we’ve got quite a conservative strategy," he said.
The fund’s objectives are to outperform cash, and its peers and index, and provide a real return, all of which it has achieved over the last 12 months – delivering cash plus 3 per cent since launch.
It has a dividend yield of 4.55 per cent, which is one of the highest figures in its offshore sector and puts it in the top quartile of funds in the IMA Global Bonds sector, too.
Around one-third of the fund is in government bonds while nearly 40 per cent is invested in BBB-rated assets.
Keen says there are several tools he and Lee use to diminish risk in the portfolio, such as moving to short duration, using currencies as a hedge, and moving in and out of credit as they please.
"We’ve given up the opportunity to generate yields for safety," Keen said.
The managers have also taken a bullish stance on the US dollar, reversing their previous view that Asian currencies would be stronger.
Keen says they had 25 per cent of the fund in US dollar-denominated assets a year ago, which is up to 90 per cent today.
"We’re trying to generate returns so if we see returns in dollars, that’s where we put the fund," he said.
"It’s the most bullish we’ve been on dollars for years, but in general the US economy seems more dynamic than others."
He adds that while thoughts of the end of QE have sent markets in many directions, in the end it is a good thing because it means the economy is improving in the US. He adds the country has begun to repair its deficit and is close to becoming energy self-sufficient, both signs that bode well for the currency.
Waverton Global Bond requires a minimum investment of £1,500 and has ongoing charges of 0.84 per cent. The fund also charges a 10 per cent performance fee.
