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The strategic bond funds beating Richard Woolnough at his own game

11 May 2015

M&G’s Richard Woolnough is regarded as one of the very best bond managers in the business and has attracted the assets to reflect this, but there are a number of his peers that have outperformed on a range of metrics without growing too large.

By Gary Jackson,

News Editor, FE Trustnet

M&G Optimal Income dominates the IA Sterling Strategic Bond sector and FE Alpha Manager Richard Woolnough is frequently cited as one of the best bond managers out there, but the latest FE Trustnet study shows some of his competitors stack up very favourably.

With assets of £24.5bn, M&G Optimal Income is the second largest portfolio in the Investment Association universe, trailing only behind the £25.2bn Standard Life Investments Global Absolute Return Strategies fund. Indeed, the fund accounts for about 75 per cent of total assets in the IA Sterling Strategic Bond sector.

It’s not difficult to see why it has had such success in attracting these assets: between launch in December 2006 and the end of April 2015, the fund posted a total return of 90.17 per cent.

That makes it the second best performer in the sector over this time frame, beaten by just 42 basis points by Mike Amey’s Pimco GIS UK Sterling Long Average Duration fund.

Performance of fund vs sector between launch and 30 Apr 2015

 

Source: FE Analytics

M&G Optimal Income is also held in very high regard by fund analysts and advisers. It appears in the AFI cautious, balanced and aggressive portfolios that are put together by FE’s panel of leading investment advisers, holds an ‘AA’ rating from Square Mile Investment Consulting & Research and is a member of the FE Research Select 100.

Furthermore, Woolnough was recently named FE Alpha Manager of the Year. He picked up this accolade in reflection of his ability to consistently add value over the market cycle on both absolute and relative points of view.

But the growing size of the fund may be off-putting to some and FE’s analysts do notes that its swelling assets are becoming “more and more constraining”, which may limit the manager’s ability to find investment opportunities of a suitable size.

Other investors may simply want to avoid putting all their eggs in one basket and are seeking other funds that can compete with the sector’s leader.

With this in mind, FE Trustnet has scoured the IA Sterling Strategic Bond sector for funds that have outperformed M&G Optimal Income on a number of important metrics over the past three years, although it must be kept in mind that past performance is no guide to the future.

We chose this time frame as it covers a big increase in the fund’s size – at the end of April 2012, it was just £7.5bn but since then has soared to its current size of close to £25bn. The metrics we’ve filtered for are higher alpha generation, Sharpe ratio and positive months, along with lower maximum drawdown and annualised volatility.

 

Source: FE Analytics

After these filters have been run, only three funds from the 78-strong sector have beaten Woolnough’s fund on these metrics and total return. In the article below, we take a look at them.

 

Aviva Investors Strategic Bond

Chris Higham’s five FE Crown-rated Aviva Investors Strategic Bond fund tops the list from a total return point of view, posting a 26.87 per cent gain over the three years in question. It also outperformed M&G Optimal Income and the average strategic bond fund over one year and shorter time frames, but slips behind Woolnough by 2.5 percentage points over five years.


FE Analytics shows Aviva’s £319m fund has a three-year alpha score of 2.3 per cent, a 2.7 per cent maximum drawdown, a Sharpe ratio of 1.47 and 3.23 per cent annualised volatility, while achieving 30 positive months out of a possible 36.

Performance of fund vs sector and M&G Optimal Income since launch

 

Source: FE Analytics

The fund is another member of the FE Research Select 100, where it is highlighted for its relative simple approach to bond investing and a reluctance to venture into more “exotic” parts of the market, unlike some of its peers. 

“Aviva have clearly put a lot of resources behind their fixed income capability and Chris oversees several of the mandates that feed into this ‘best ideas’ fund,” FE’s analysts said.

“It could easily be seen as a core bond fund holding in a portfolio, providing the investor does not want to actively manage their allocation between government and corporate bonds.”

The fund’s history since launch can be broken down into two main phases. During 2008, Higham invested in government bonds which helped to protect capital during the financial crisis, then it added risk through lower rated debt in 2009 and significantly outperformed their peers in the market rebound. Since then, performance has been driven through stock selection rather than broader asset allocation.

Aviva Investors Strategic Bond has a clean ongoing charges figure (OCF) of 0.63 per cent and yields 4.24 per cent.

 

Artemis Strategic Bond

Of our Woolnough competitors, this £835.3m fund managed by Alex Ralph and James Foster leads when it comes to alpha generation with a score of 2.32 over three years. This ranks it 12th in the sector overall, which is topped by GAM Star Credit Opportunities.

The fund has made a 25.69 per cent total return over three years, with annualised volatility of 3.04 per cent, 30 positive months, a Sharpe ratio of 1.45 and a 2.38 per cent maximum drawdown. The four FE Crown-rated portfolio is also ahead of its average peer over five years and since launch in June 2005.

Performance of fund vs sector since launch

 

Source: FE Analytics

Square Mile gives Artemis Strategic Bond an ‘AA’ rating, pointing out that the managers aim to preserve capital over the market cycle although this is not guaranteed and substantial short to medium-term volatility can sometimes occur.


“Foster and Ralph are experienced investors, who have proven themselves capable of managing this flexible mandate through various market conditions,” the consultancy’s analysts said.

“We believe that the managers have complementary skills, with Foster focused on top­down macroeconomic analysis and Ralph's skill set focusing more on detailed credit analysis.” 

Although the fund has a flexible mandate, it tends to have a bias towards corporate bonds in both the investment-grade and high-yield parts of the market. This means it can be more aggressive than its typical peer.

The managers’ process results in a “focused but diversified” portfolio of between 50 and 100 holdings. They are currently finding opportunities in the high-yield market, as this where they are seeing the most value.

Artemis Strategic Bond has a 0.59 per cent OCF with a 4.61 per cent yield.

 

Jupiter Strategic Bond

When it comes to funds that can steadily grind out returns, FE Alpha Manager Ariel Bezalel is one of the best in the sector, with 31 positive months. Only GAM Star Credit Opportunities achieved more with 34 (the fund was not included in this shortlist only because it is more volatile than M&G Optimal Income).

Since launch in June 2008 it has significantly outperformed its average peer with an 87.54 per cent gain. This is also just higher than the M&G fund’s return over the same period.

Performance of fund vs sector and M&G Optimal Income since launch

 

Source: FE Analytics

Meanwhile, the fund’s alpha score over three years has been 2.22, it posted a 2.76 per cent maximum drawdown, has a Sharpe ratio of 1.23 and annualised volatility of 2.94 per cent.

The fund, which holds four FE Crowns, is also a member of the FE Select 100, owing to Bezalel’s track record in running his unconstrained mandate and his process of combining top-down macro views with company analysis.

The FE Research team said: “Bezalel has taken full advantage of his unconstrained mandate. By varying the portfolio’s allocation to government bonds or high or low-rated corporate bonds according to his assessment of the economy, he has generated outstanding performance since the fund’s inception.”

Bezalel currently has a high weighting in high quality government bonds, on the back of concerns that a combination of deflation and low economic growth is creating risks for corporate bonds that the market is not pricing in.

Jupiter Strategic Bond has a clean OCF of 0.73 per cent and currently yields 4.90 per cent.

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