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The alternatives to Old Mutual Global Strategic Bond

20 April 2015

OMGI has announced that Stewart Cowley, manager of the Old Mutual Strategic Bond fund is to leave the group, but help is on hand from Neil Shillito and Darius McDermott who highlight three alternative funds

By Daniel Lanyon,

Reporter, FE Trustnet

The Jupiter Strategic Bond fund makes an ideal replacement for investors looking to sell out of the Old Mutual Strategic Bond fund following the news of its manager Stewart Cowley imminent departure, according to Neil Shillito of SG Wealth Management and Chelsea Financial’s Darius McDermott.

Though he is one of the most highly-respected fixed income managers in the industry, FE Alpha Manager Stewart Cowley’s £559m Old Mutual Strategic Bond fund has been through a difficult few years shedding money both from losses and outflows.

By betting big that the Federal Reserve would move to raise interest rates, Cowley was preparing for higher yields in the bond market which have yet to materialise and resulting in a loss of more than five per cent in the portfolio’s value since March 2013. The IA Global Bonds sector took a similar turn through some of period but has made a snappier return to form than Old Mutual Strategic Bond which only very recently began to move upwards.

Performance of fund and sector over three years

Source: FE Analytics

The fund will be managed by John Peta and Christine Johnson following Cowley’s departure in June, OMGI says, utilising their respective experience in emerging market debt and total return strategies but while “retaining in full the duration strategy that has been evident in the past”.

Both Peta and Johnson have enviable long-term track records, but if investors are looking for alternatives now Cowley is set to leave the group, both Neil Shillito – director at SG Wealth Management – and Chelsea Financial Services’ Darius McDermott say there top pick would be with FE Alpha Manager Ariel Bezalel’s Jupiter Strategic Bond fund.

Shillito and McDermott, back this £2.6bn fund as a top alternative to Cowley’s fund despite it sitting in the IA Sterling Strategic Bond sector.


However, given that both Cowley and Bezalel have used high amounts of flexibility within the fixed income market to outperform and protect their investors’ capital over the longer term, they agree that Jupiter Strategic Bond is a suitable replacement.

Managed by Bezalel since its inception in 2008, it sold off soon after launch harder than the market but has rebounded and has made a total return of 90.89 per cent while its benchmark, the IBOXX Sterling Non Gilts All Maturities Index, gained 67.7 per cent while the average fund in the IA Sterling Strategic Bond sector clocked up a return of just 51.01 per cent.

Performance of fund, sector and index since 2008

Source: FE Analytics

The manager’s biggest bet is on Australian government debt with about a quarter of the fund’s portfolio exposed to the asset class.

Shillito says Bezalel has a good track record and a broad spread of strategies which chimes with Cowley’s style.

“It has a similar remit and very good performance and consistency so we’d be happy to point people in their direction,” Shillito said.

“It has a healthy mix of different asset classes from sovereigns right down to high yields. It does what the name might suggest which is similar to Cowley’s philosophy as well, that while you can run a single strategy bond portfolio the bond market is very fickle and sensitive to any sort of economic news.”

“With fixed interest, a good blend will give you more secure returns over the longer term.”

McDermott meanwhile says Bezalel has a true global outlook and seems unimpeded by the vast universe of fixed income, using it to his advantage in a bond market where yields are at historic lows.

The fund has an ongoing charges figure [OCF] of 0.74 per cent and a current yield of 4.9 per cent.

Shillito secondly backs the £24.5bn titan of the IA Sterling Strategic Bond sector; the M&G Optimal Income as well as the relative smaller £1.5bn Fidelity Strategic Bond as good replacement for Cowley’s fund but says they are not as a good a fit as the Jupiter fund.

Both are run by FE Alpha Managers – Richard Woolnough and Ian Spreadbury, respectively.

M&G Optimal Income is the largest fund with the Investment Association universe but its size has attracted some attention although Shillito is unfazed believing the Woolnough has a proven track record in the fixed income space and has a broad enough collection of strategies.

“This a very good fund. Richard tends to have a more diversified portfolio and given what M&G paid him last year he probably deserves what he is getting.”

Like Woolnough has a moderately bullish sentiment to markets telling FE Trustnet last year that he thinks “everything is going to be fine as the market transitions into a diverging central bank defined world, Spreadbury believes 2015 will be another good year for bonds.


“My base case for 2015, for slow growth and low inflation, remains. Interest rates rises are a possibility but are unlikely to derail bond markets so net-net I’m still expecting decent returns from bonds again in 2015. Maybe not quite as high as they were in 2014, but we should still get decent returns,” Spreadbury said back in March.

Over the past five years the two funds have both returned just a shade under 40 per cent but M&G Optimal Income has done slightly better than Fidelity Strategic bond and with lower volatility. The pair are also comfortably ahead of the sector average.

Performance of funds and sector over 5yrs

Source: FE Analytics

M&G Optimal Income has also beaten the sector average in six out of the last eight calendar years and is the second best performing portfolio since it was launched in 2006.

M&G Optimal Income has an OCF of 0.91 per cent and 2.72 per cent yield. Fidelity Strategic bond has an OCF of 0.68 per cent and a yield of 3.41 per cent.

 

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