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Snowden: Woolnough, Read, Causer and Spreadbury will all underperform

28 May 2014

Kames' Stephen Snowden tells FE Trustnet why he thinks some of his most popular peers will struggle to replicate their strong past performance.

By Alex Paget ,

Senior Reporter, FE Trustnet

There is a serious lack of liquidity in the current bond market, according to Kames’ Stephen Snowden (pictured), who warns that funds with billions worth of assets under management will bear the brunt and underperform as a result.

Snowden, who manages the £763m Kames Investment Grade Bond fund, attempts to maintain a high conviction and active portfolio. However, he says that the current environment is becoming very illiquid and therefore his portfolio turnover rate has dropped noticeably over recent years.

ALT_TAG While he admits it could present a problem going forward, he says that his rival corporate bond managers who are running multi-billion pound funds will struggle even more.

“The market is less liquid than it used to be, that is undeniable,” Snowden said. “We can see that from our own turnover, which has almost halved since before the crisis kicked off.

“But, some are still saying that there is absolutely no liquidity problem.”

Snowden holds 131 stocks in his portfolio, which is less than the average fund in the IMA Sterling Corporate Bond sector. He suggests, however, that some of his rival managers, who run a lot more money than him, are having to increase the number of their holdings in their funds to combat illiquidity and because individual stock selection is becoming far more difficult.

The table below, from Snowden's data, shows each of those manager’s total assets under management – which includes all the funds they run – and the number of holdings they have in their IMA Sterling Corporate Bond funds. The funds in the table are Richard Woolnough’s £5.1bn M&G Corporate Bond fund, Paul Read and Paul Causer’s £5.5bn Invesco Perpetual Corporate Bond fund and Ian Spreadbury’s £3.1bn Fidelity MoneyBuilder Income fund. 

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Source: FE Analytics

However, as Snowden rightfully points out, all of those managers have justified the inflows they have seen.

According to FE Analytics, for instance, M&G Corporate Bond, Invesco Perpetual Corporate Bond and Fidelity MoneyBuilder Income have all been top quartile performers over a rolling 10 year period.


Performance of funds versus sector over 10yrs

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Source: FE Analytics

However, Snowden warns that their current AUMs will hinder them in the future and expects those sorts of portfolios to underperform over the coming years.

“These characters have undoubtedly delivered strong performance in the past and they have justifiably raised a lot of assets,” Snowden said.

“But, common sense would tell you that the bigger anything gets, the harder it is to change. If this industry is about trying to pick the right funds for the future, looking forward, I think those that are more nimble have a much better chance of delivering the returns over the next five years.”

However, a spokesperson for Read and Causer at Invesco Perpetual, like Causer told FE Trustnet last year, says that size won’t be the major issue when it comes to future performance.

“The primary factor is how your portfolio is positioned, not how big it is,” the spokesperson said.

“We’ve achieved good returns and this has increased the size of our funds. Performance has been a large part of our asset growth, alongside inflows. We’ve performed well in different markets and with different fund sizes.

“So, whilst you might imagine that it would be best if all funds were the same size that really would be overemphasising the importance of liquidity relative to the investment decisions that really drive long-term performance.”

Ian Spreadbury agrees with the team at Invesco Perpetual.

“I believe it’s not so much the size of the fund that investors should worry most about. Rather, investors need to understand the amount of credit risk in their bond fund, quickly evidenced by its exposures to high yield and subordinated bank paper,” Spreadbury said.

“These areas of the market would likely experience the poorest liquidity in a stressed environment. So a small fund heavily invested in these assets will face a much tougher time in a bearish market compared to a large fund with holdings skewed towards government and high quality corporate bonds.”

Woolnough has, on many occasions, defended the size of his funds though he admits that his £20bn M&G Optimal Income fund is becoming more difficult to move around and that he is combating any potential future capacity constraints by increasing their team and resources.

A spokesperson from M&G said: “Richard’s investable universe, which encompasses the global bond market, is over £15trn. It is a very deep and very liquid universe and the size of his funds doesn’t stop him from expressing the views he wants to express,” they said.

“Size hasn’t impacted his performance and as long as he can continue to meet his investment objective he doesn’t think his assets under management cause him any issues.”

Snowden understands why groups allow their funds to grow to multi-billion pound portfolios, however he says that if his £753m Investment Grade Bond fund were to grow too big, they would give their investors plenty of forward guidance.

“We [Kames] are no different from everybody else,” Snowden said.

“We are clearly compromised because fund management groups like ourselves have to make money. If we don’t make money, we don’t exist and the bigger our funds are, the more money we make.”

“However, hopefully what we did with the High Yield fund, where we announced when it reached £1bn we would close it at £2bn, shows that, perhaps, we do listen a little bit more, perhaps, than other groups out there,” he added.

Snowden has managed his Kames Investment Grade Bond fund, with Euan McNeil, since September 2011.

According to FE Analytics, it has been a top quartile performer over that time with returns of 26.28 per cent and boasts top quartile returns in 2012, 2013 and so far in 2014.


Performance of fund versus sector since September 2011

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Source: FE Analytics

The fund has grown from £233m to £753m over the last three years, though Snowden says the decision on when it would be soft-closed isn’t his to make.

“As a former boss once told me, I don’t own the thing, I just run it. I’m only employed to run the fund, it’s not my decision. But, the CEO will get a very good idea of what I think the right number is,” Snowden said.

Kames Investment Grade Corporate Bond has a yield of 3.06 per cent and its clean share class’ ongoing charges figure (OCF) is 0.8 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.