As an FE Trustnet article highlighted this morning, Chris Metcalfe (pictured) – investment director at IBOSS – is actively avoiding £1bn-plus bond funds due to concerns about potential liquidity issues in the asset class.His major worry is that managers who run a large pool of money will struggle to manoeuvre their portfolios efficiently enough if yields were to spike – an issue recently highlighted by the FCA.
As the bulk of investors will always want exposure to fixed income within their portfolios, we highlight three sub-£1bn strategic bond portfolios the experts are using instead of the sector’s behemoths.
TwentyFour Dynamic Bond
To replace his holdings in the multi-billion Jupiter Strategic Bond and Fidelity Strategic Bond funds, Metcalfe has added the five crown-rated TwentyFour Dynamic Bond fund to his recommendation list.
Metcalfe rates the fund’s management team of Gary Kirk, Eoin Walsh, Felipe Villarroel and Pierre Beniguel and says that, at £459m, it is in a “sweet spot” in terms of size.
“It has a good track record, they are high conviction and aren’t benchmark constrained. Not being benchmark constrained is vital because if you are going to be in fixed income you have to go with managers who will move the portfolio as they like.”
He added: “Otherwise, I don’t think there is any point using bond funds at all. For managers to go where they want, they need the flexibility.”
According to FE Analytics, TwentyFour Dynamic Bond was launched in April 2010 and has been a top decile performer in the IMA Sterling Strategic Bond sector over that time with returns of 43.13 per cent.
Performance of fund vs sector since Apr 2010
Source: FE Analytics
Though the fund fell further than most in the sector in 2011, it was a top quartile performer in 2012 and 2013 and is so far top quartile in 2014 with returns of 5.77 per cent.
The TwentyFour fund has a yield of 4.95 per cent and the managers currently hold 23 per cent in high yield credit, 32.5 per cent in bank debt and 21 per cent in asset-backed securities. They hold just 2.5 per cent and 2.8 per cent in investment grade credit and government bonds, respectively.
Its ongoing charges figure (OCF) is 0.85 per cent.
GAM Star Credit Opportunities
Andy Parsons, head of research at The Share Centre, agrees that investors should be aware of the dangers of backing large bond funds in the current environment.
“I totally concur with Chris Metcalfe,” Parsons (pictured) said. “We always have reservations about the behemoths in the bond sectors.”Because of that, Parsons and his team favour strategic bond funds with smaller AUMs because they have the greatest degree of flexibility to add value on a stock-by-stock basis. One of his favourites is FE Alpha Manager Anthony Smouha’s £114m GAM Star Credit Opportunities fund.
The five crown-rated fund was launched in July 2011.
Our data shows it has been the best performing IMA Sterling Strategic Bond fund over that time with returns of 44.39 per cent, more than doubling the sector’s average return in the process.
Performance of fund vs sector since July 2011
Source: FE Analytics
Though the fund initially underperformed the sector, as the graph above shows, it was the best performing portfolio in 2012 and 2013. It is also the sector’s second best performing portfolio this year with returns of 9.32 per cent.
Parsons rates the fund due to Smouha’s approach.
“They look at investment grade issuers, but will invest lower down the capital structure. They think that if you have a top quality issuer, you should be happy to hold their lower-rated debt and this has helped them to generate an extra level of income,” he said.
The Irish-domiciled GAM Star Credit Opportunities fund has a yield of 4.97 per cent. Its total expense ratio (TER) is 1.56 per cent.
Old Mutual Monthly Income Bond
Parsons is also a fan of the £145m Old Mutual Monthly Income Bond, which is managed by Christine Johnson.
“We met Christine Johnson the other week and we think she is really, really impressive,” he said.
“One of the reasons we like this fund is because it is different to most other bond funds as it pays out monthly. We think that sits very well with investors who are trying to construct a diverse portfolio.”
“At under £150m, it really is very nimble and so far she has had an impressive track record running the fund.”
Though the five crown-rated portfolio was originally launched in September 2004, Johnson has only been running the portfolio since September 2010.
Over that time, Old Mutual Monthly Income Bond has returned 26.76 per cent while the IMA Sterling Strategic Bond sector has returned 23.75 per cent.
Performance of fund vs sector since Sep 2009
Source: FE Analytics
The fund was a bottom quartile performer in the turbulent market of 2011, but bounced back with top quartile returns in 2012 and 2013.
Johnson is currently net short government bonds. Instead, she sees opportunities in credit with a 36.4 per cent weighting to investment grade corporates and 54.1 per cent to high yield debt. The fund yields 5.5 per cent as a result.
Old Mutual Monthly Income Bond has an OCF of 0.87 per cent.
