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TwentyFour warns bond volatility is just “little taster” of more to come

14 August 2014

The boutique bond manager says a liquidity crisis isn’t on the cards, but that it is de-risking nonetheless.

By Daniel Lanyon,

Reporter, FE Trustnet

Investors should prepare for choppy performance from corporate and strategic bond funds but should not expect a full-scale liquidity crisis for small or large bond portfolios, according to Eoin Walsh, portfolio manager at TwentyFour Asset Management.

ALT_TAG Liquidity concerns have abounded in bond markets over the past year with the likes of Henderson’s James De Bunsen warning of a massive crisis brewing due to quantitative easing and its ongoing ‘tapering’ in the US.

This anxiety has seen many investors exiting bonds or becoming increasingly wary of the sector - particularly when it comes to the largest funds as they are widely expected to be hardest hit by liquidity concerns.

The FCA recently waded in and warned investors that they may have difficulty selling their units in the bigger bond funds if liquidity were to ebb away as a result of rising yields.

Data from FE Analytics shows products such as the M&G Strategic Corporate Bond and M&G Corporate Bond funds have seen some of the biggest outflows in 2014.

However, Walsh says that while liquidity has been extremely poor over this period, the panic seems to receding.

“The recent sharp move down over the past six weeks has been caused by very light volumes with little trading going on. Over the past few days we have had the real money buyers coming back into the market to pick up cheap bonds.”

“So what we are seeing now is the price going up - all of this is driven by the illiquidity. It is really just exaggerating the price moves. You get more volatility but not for any real fundamental reason. This should mean a bit more volatility in the performance of bond funds but in the long term it should even out.”

“During this period more liquidity will be provided as investors in all bonds move around and we’ll see the market move. There will be quite sharp moves in both directions.”

Bond yields have shot up in high yield debt over the past few months, especially in recent weeks with the average fund in the IMA Sterling High Yield sector losing more than 1 per cent in six weeks.

In comparison gilt funds have in average made 2.45 per cent over this period.

Performance of sectors since 1 July 2014


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Source: FE Analytics


“What we have found over the past few months is a real risk-off period with a lot of geo-political events such as the outbreak of violence in the Middle East, the Ukraine and Russia stand-off, the Banco Espirito Santo problems and the default by Argentina on its debt,” he said.

“The whole series of events has come together to make liquidity as poor as we have ever seen it. It has been really, really difficult to move any size of bonds, even £2m, £3m or £4m which you would expect to move quite easily.”

“We don’t see this going away and it will reach a crescendo but we don’t see a full-on crisis in bonds on the horizon. Central banks have been very supportive of markets and are looking very closely at the UK economy and also don’t look to be raising rates any time soon.”

The bond bears also point to the almost inevitable raising of interest rates from their ultra-low levels and the end of QE as a potential trigger for a sell-off induced crash and Walsh says he is making changes to protect against and take advantage of the uncertainty.

“Our biggest concern is the period when rates are beginning to rise. That will be a very choppy period. We think we will see a lot more volatility and what we have seen in the past few weeks is a little taster of that.”

“However, we will be looking some changes and looking at having bond holdings in things that have a lot higher liquidity. That could be very safe, top of the capital structure, asset-backed securities or government bonds but also just holding more cash.”

“It makes sense to try and keep a bit more liquidity in the portfolio and have a bit more cash to take advantage of a cheapening of bonds – you certainly don’t want to be a forced seller.”

Walsh, who co-manages the £505m PFS TwentyFour Dynamic Bond fund, says potential liquidity problems shouldn’t necessarily affect larger bonds more than smaller ones.

“The selling we have seen this week didn’t come from any of the larger funds. It was more likely from the fast money such as hedge funds – what you might call tourists in the sector.”

The fund has returned 39.42 per cent compared to an IMA Sterling Strategic Bond sector average of 22.65 per cent.

Performance of fund, sector and index over 3yrs

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Source: FE Analytics


A recent study from FE Trustnet highlighted that large corporate bond funds have not underperformed their smaller, more nimble rivals over the past few years with our data suggesting that the size of giant bond funds in the IMA Sterling Corporate Bond sector has had no impact on their ability to outperform.

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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.