Old Mutual Global Strategic Bond will retain its defensive stance but the new managers of the portfolio say it will offer a more constructive view of the bond market than under Stewart Cowley and are aiming to boost the yield created. 
Cowley had run the fund since June 2009 but left Old Mutual Global Investors in June this year to launch a consultancy providing investment advice and portfolio management to advisers and fund groups.
The manager was seen as a star in the bond sector but his cautious positioning led to lacklustre returns over his final years on the fund.
Over his time in charge of the portfolio, Old Mutual Global Strategic Bond made a total return of 35.51 per cent compared with a 37.04 per cent average return from its IA Global Bond peer group. As the graph below shows, the fund outperformed its peer group over much of the manager’s time on the fund.
Performance of fund vs sector over manager tenure
Source: FE Analytics
However, progress was tougher over the latter years. Our data shows the fund sat in the sector’s fourth quartile over Cowley’s last three years on the fund with a 1.32 per cent total return; its average peer has made more than double this.
Cowley described himself as “the bond manager that hates bonds” and this view, combined with his top-down approach, lead to a very conservatively positioned portfolio. The cash position, for example, stood at close to 18 per cent on the manager’s departure.
The new managers – Christine Johnson (pictured), head of fixed income at Old Mutual Global Investors, and John Peta, head of emerging market debt – maintain that the fund will continue to have a cautious stance on bond markets, but will chase a wider set of opportunities to be a more pragmatic offering.
Peta said: “It’s a fund that is trying to protect clients’ assets but is probably a little less extreme than under Stewart. Under Stewart you might have used the fund as an asset allocation vehicle if you were really quite negative on bonds; we’re in the camp that bonds aren’t great value but can still serve a purpose in providing income.”
“While the income might seem pretty skimpy compared to the past, that’s probably the way it’ll be for a while. It is a new world and we recognise that – we want to protect the asset but still provide some income. The general idea is to increase the number of things that we can do.”
Sentiment in bond markets has been dominated over recent years by speculation over when the Federal Reserve and Bank of England will make their first interest rate hikes since the onset of the financial crisis. Rates in both countries are still a record lows but are expected to start moving upwards soon – with the Fed widely tipped to make its first move in September this year.
Johnson and Peta agree that it is right for interest rates to start moving higher given the relative strength of the US economy. But they do not expect this to cause meltdown in the bond market, as some more cautious managers such as JP Morgan’s Bill Eigen expect.
Peta said: “Interest rates, while they need to go higher, shouldn’t reverse the huge bond market rally that we’ve seen over the last 20 years or so. The world is a different place, it’s more leveraged, and therefore you would think that the nominal and real levels of interest rates will likely be lower going forward than they have been in the past.”
“So there’s reason to be cautious but not reason to think that Armageddon is around the corner. If the Fed starts to raise rates in September it’s not going to be a repeat of what they did in 2004 and 2005 when they went for 25 basis points at every meeting and ended up at 5.25 per cent. We would expect that rates end up at probably 3 to 3.5 – a much more gradual and less deliberate increase in rates.”
This view, along with a plan to increase the yield from the relatively low levels offered by the fund in the past, means the managers are willing to dip into areas that Cowley would have tended to overlook. The cash weighting has come down from 17.9 per cent at the time of Cowley’s exit to around 7 per cent today.
Given Peta’s experience in the developing world, it’s not surprising to hear that exposure to emerging market (EM) debt has been added to Old Mutual Global Strategic Bond over recent months.
Performance of currencies vs US dollar over 3 months
Source: FE Analytics
“Even though we’re not really fond of EM right now, there’s things that we can do in the fund by expanding the number of countries we can look at and by going both long and short. For example, we’re short a bunch of currencies in EM land, because EM currencies have not been enjoying the best of returns recently with what’s happening in China,” the manager said.
“Within the EM world, growth rates have been coming down, partly because of China and partly because of their individual dynamics. The stronger US economy means a stronger dollar and that is pushing down on EM currencies and commodity prices. All these things are interlinked and as China continues to decelerate, the market will focus on this.”
Some of the earliest moves by the new managers were to short emerging market currencies. They currently have shorts in place on the New Zealand dollar, Malaysian ringgit, Taiwanese dollar, Chilean peso, South Korean won and Thai baht; the graph on the previous page shows how two of these currencies have depreciated against the US dollar over the past three months.
The fund has been buying emerging market bonds in addition to shorting currencies, though.
“Interest rate exposure has also been taken to countries that are hurting because of China and lower commodity prices. For example, bonds in New Zealand, Thailand and India. We think those countries can cut their rates some more, which will hurt their currencies but benefit their bond markets.”
Outside of emerging markets, Johnson and Peta has more cautious when it comes of US bonds given the likelihood that the Fed will soon move rates higher. They are more constructive on Europe, however, given the European Central Bank’s quantitative easing programme and currently have exposure to German, Spanish and Italian bonds.
Peta added: “When it comes to corporate credit risk, we are generally more cautious. You would think that if the US and UK economies are doing well, their corporates would be doing well. That’s generally the case, but the circumstances are a little different in that we had QE in those countries and one of the results of that was pushing up prices of financial assets, which has pushed credit spreads in the developed world probably tighter than they should be.”
“We have some corporate credit risk, but it’s more on the short end in selected names. We’re waiting for credit to widen a bit as the Fed hopefully raises rates. Credit seems to have a kneejerk reaction when that happens so it should go to better levels.”
Since Johnson and Peta took over Old Mutual Global Strategic Bond, the portfolio has made a four-quartile loss of 6.32 per cent while its average peer has fallen 3.88 per cent. However, it must be kept in mind that four months is a very short time frame for performance, especially when a fund is being brought around to a new approach.
Performance of fund vs sector over manager tenure
Source: FE Analytics
Charles Younes, fund analyst at FE Research, points out that the fund is a former member of the FE Select 100 but was removed when Cowley departed as manager. However, he notes that the new managers have good track records over their careers.
“We removed the Old Mutual Global Strategic Bond fund from the Select 100 as it now a very different product to the one established by Cowley. We liked the fund because it was driven by Cowley’s top-down views – such as his stance on US interest rate rises – and we did give it a number of years to see if they came through,” Younes said.
“Under the new managers, the fund is now a more mainstream product, which aims to have a more pragmatic approach and places greater emphasis on stock selection. While Johnson and Peta seem to have good track records in doing this, we want to see how the new process plays out over time before considering adding it back to our list of recommended funds.”
Old Mutual Global Strategic Bond has a clean ongoing charges figure (OCF) of 0.65 per cent and yields 0.68 per cent, though that is expected to rise over the coming months as the new portfolio takes shape.