Flexibility has been the biggest selling points of fixed interest portfolios, and with good reason. Funds in the IMA Sterling Strategic Bond sector have had significant inflows, with industry leaders such as M&G Optimal Income, Jupiter Strategic Bond and Fidelity Strategic Bond leading the way.
All of these are now billion-pound portfolios – M&G Optimal Income leading the way with more than £20bn. While fund size tends to be more of an issue for equity vehicles, the bigger the bond fund, the harder it is for it to move quickly from one asset class to another. This is particularly important at the moment, with experts claiming that fixed interest is at an inflexion point.
One specialist bond house with a sterling reputation among industry professionals in particular is TwentyFour Asset Management. The firm was founded in 2008, and has four open-ended fund and one investment trust.
PFS TwentyFour Dynamic Bond is the largest, with just over £400m in assets, while the TwentyFour Income IT is £325m in size. The remaining three are all under £150m.
Dynamic Bond and PFS TwentyFour Focus Bond are the most mainstream of the portfolios. Sitting in the IMA Strategic Bond sector, they must have at least 80 per cent of their assets in sterling, or in assets hedged back to sterling. The trust has a similar structure and focus.
The team doesn’t simply split its assets between government and corporate bonds however; they invest in a number of different areas of the market, including asset-backed securities, inflation-linkers, emerging market sovereigns, bank capital perpetual bonds and much more.
PFS TwentyFour Monument Bond is a specialist fund investing in European and Australian residential mortgage-backed securities (RMBS), while PFS TwentyFour Asset Backed Income specialises in asset-backed securities.
TwentyFour is well-known among fund on funds managers, with F&C’s Gary Potter and Rob Burdett, Old Mutual’s John Ventre and Premier’s Mark Elliott among its biggest fans.
Potter (pictured) believes many model portfolios will buy the funds in the next three or four years, and expects chief executive Mark Holman and his team to be future household names.
F&C holds two of the TwentyFour funds in its Navigator range. Potter says he hopes the funds remain small and nimble, as being able to demonstrate specialist knowledge will be the only way to eke out returns in an increasingly difficult environment for bonds.
“A lot of their funds haven’t been going five years and some haven’t been going for three years and so are not on the box-tickers radars yet,” he said. “However, I defy anybody who looks at their funds to have a relatively negative view on them.”
“Increasingly in the bond sector you are going to require nimbleness and specialist knowledge of specialist parts of the fixed income world.”
“The bond market as a result [of new regulations] is changing dramatically. You need very specialist knowledge now and TwentyFour is employing dedicated specialists in these spaces. They are a boutique bond business and all they are going to do is bonds but they are going to do it extremely well.”
“They have had it spot on in identifying the direction and trends in markets of the fixed income sector. They recognised a few years ago that following the credit crunch they would have to bring a different set of knowledge, expertise and analysis to certain parts of the bond market and the results are there for all to see.”
The newest fund to launch in the stable, the TwentyFour Income trust is just over a year old having been launched in March 2013.
It has trounced the IT Debt sector average since launch with returns of more than 20 per cent.
Performance of fund and sector since Jan 2013
Source: FE Analytics
“The fund was only launched last year so some people would have said they could not have possibly touched it until it had its three-year track record,” Potter said.
“There are larger bond funds that are running huge amounts more but if you are looking for a boutique with specialist and expert knowledge in asset backed securities and residential backed securities, these guys have a skill-set in that space.”
Another newcomer – the PFS Asset Backed Income – launched in January 2013. Whilst sitting in the IMA Specialist sector, it has beaten every fund in the IMA Sterling Strategic Bond sector by a comfortable margin since inception.
It has returned 35.66 per cent since its launch whilst the best fund in the IMA Sterling Strategic Bond sector – GAM Star Credit Opportunities – has returned 20.37 per cent.
Performance of fund and benchmark since Jan 2013
Source: FE Analytics
The TwentyFour Focus Bond fund has been a top quartile performer since its launch in February 2012, making it the seventh best performer overall in the IMA Sterling Strategic Bond sector. Over this period it has returned 28.78 per cent compared to the sector average’s 16.79 per cent.
Performance of fund, sector and benchmark since Feb 2012
Source: FE Analytics
Steven Richards, who heads up the Thesis multi-manager range, says TwentyFour Monument and TwentyFour Dynamic are attractive for those who don’t want interest rate risk – particularly topical at the moment given Mark Carney’s recent comments.
“If anything we were too early, buying [Monument] two years ago,” he said. “We bought in to protect against interest rate risk because we knew it would come at some point.”
“TwentyFour uses a wider universe than your classic strategic bond fund managers. RMBS are particularly useful. They act as a big diversifier versus normal fixed interest investing. You're not taking on credit or liquidity crisis, which you do with conventional corporate bonds.”
“One of the threats facing the corporate bond market is liquidity when it reverses. The TwentyFour Monument Bond fund has a bigger liquidity pool because they are investing in RMBS.”
Monument and Dynamic are the only funds with a three year track record, and both have the maximum five FE Crowns.
The TwentyFour Dynamic Bond fund has performed even better than the Focus fund, delivering 44.27 per cent to investors since its launch in 2010. This puts it fourth in the sector over the period, and well ahead of M&G Optimal Income [36.84 per cent], Jupiter Strategic Bond [36.57 per cent] and Fidelity Strategic Bond [29.47 per cent].
It is also well ahead of its cash benchmark.
Performance of fund, sector and benchmark since Apr 2010
Source: FE Analytics
The TwentyFour Monument Bond fund has returned 24.66 per cent since its launch in 2009. It is also comfortably ahead of its cash benchmark.
In total TwentyFour manages just over £3bn, which includes bespoke mandates. The team is made up of 12 managers, who Potter rates very highly.
“It is a team that is very motivated to build its business through performance and that is a pretty potent cocktail for success,” he said.
“You know that particular people are running particular parts of the portfolio, because they are specialists in what they do, and are generating alpha in their chosen fields.”
“We got to know the business very early on but they have built up their capability since then, and are even more specialised. I think the business is pretty scalable,” he added.
The TwentyFour team includes founders Ben Hayward, Eoin Walsh, Gary Kirk and Rob Ford, who are named on all of the funds.
Aza Teeuwen, Felipe Villarroel and Douglas Charleston have joined more recently.
