Bond funds looking at non-mainstream assets, such as GAM Star Credit Opportunities and TwentyFour Dynamic Bond, are among the best performing fixed income portfolios in the Investment Association universe this year, according to research by FE Trustnet.
Fixed income has been one of the broadest parts of the market to suffer in 2015 owing to worries that the 30-year bull market is drawing to end, precipitated by intensifying concern that the catalyst will be US interest rates rising soon, potentially this week.
As Nick Gartside (pictured), chief investment officer for fixed income at JP Morgan Asset Management, noted: “We definitely think there’s a good chance that rates will go up this Thursday. The market is expecting the Fed not to raise rates but with US economic fundamentals as robust as they are, there’s really nothing preventing them from raising rates.”
“Strong US economic data releases, a response from Chinese policymakers in light of the recent turmoil in emerging markets which we’ve seen and the volatility of US financial assets, such as equities and credit spreads, declining. Add these three conditions together and we think there’s good reason for the Fed to pull the trigger and raise rates this week.”
However, a host of bond funds in the IA Sterling Strategic Bond sector with flexible mandates to go into more avante garde parts of the credit market have posted reasonably returns while most others in the sector have lost cash.
The best performer in the sector is a tiny fund of funds, the £6.1m City Financial Diversified Fixed Interest fund, which holds the likes Legg Mason Income Optimiser, Artemis High Income, Schroder Monthly High Income, Kames Capital High Yield Bond and PFS TwentyFour Dynamic Bond.
Performance of fund, sector an index in 2015
Source: FE Analytics
The GAM Star Credit Opportunities fund, managed by FE Alpha Manager Anthony Smouha, is second best having returned 4.21 per cent.
It is still a nimble £223m but has been attracting a lot of cash relative to its size over the past year, more than doubling in size. Fans include FE’s team of analysts, who include it on the FE Invest Approved Funds List.
There are few top performing funds which still have a small sized portfolio but are headed-up by such experienced and highly-rated management teams, Smouha having several decades’ worth of experience in fixed income markets.
He launched the GAM fund, which carries five FE Crowns, in July 2011, since when it has been the best performing portfolio in the IA Sterling Strategic Bond sector and more than doubled the sector average.
Performance of funds versus sector since launch
Source: FE Analytics
FE fund analyst Markuz Jaffe says a major reason behind Smouha’s outperformance this year is an approach that revolves around focusing on high-rated investment grade issuers but buys debt lower down the capital structure, a strategy that should pay off when bond markets are weaker.
“The fund’s natural hunting ground for investment is in fixed income securities of investment grade issuers that are lower down in the capital structure, and as a result can sometimes behave like equities, but while paying an attractive coupon,” he said.
“This extra coupon income acts as a buffer to help absorb adverse market movements, such as those surrounding the US Federal Reserve meetings. Additionally the managers will purchase floating rate bonds as further protection if necessary, whose prices will rise alongside interest rates if and when that occurs.”
The £60m Sanlam SPI Strategic Investment Grade Bond fund continued its strong 2014 – where it made money in every calendar month – to be the third best portfolio in the sector this year, returning 3.44 per cent.
Managed by Sanlam head of fixed income Craig Veysey since 2012, it has a diversified portfolio, both geographically and in terms of different parts of the fixed income market, but holds more regular parts of the market than the other funds mentioned in this article.
The £1.2bn PFS TwentyFour Dynamic Bond and PFS TwentyFour Focus Bond also took on plenty of cash this year, with the former the greatest recipient of net inflows in the sector, and both are the next two best performers.
Performance of funds and sector in 2015
Source: FE Analytics
PFS TwentyFour Dynamic Bond and PFS TwentyFour Focus Bond, managed by Eoin Walsh, Gary Kirk, Felipe Villarroel and Pierre Beniguel, have very flexible mandates and usually head for the more esoteric parts of the credit such as asset-backed securities (ABS) and processed bank debt.
Rob Morgan (pictured), fund analyst at Charles Stanley, says the team structurally holds a high allocation to these areas as the six portfolio managers know the financials, high yield and ABS parts of the market the best.
“They [the portfolios] have tended to look different from peers. They have been well exposed to sectors that have performed well in recent times, namely mezzanine, ABS and banks,” he said.
“We like the approach of maximum flexibility when constructing the portfolio, and so far the managers have made some astute calls, but we are yet to be convinced that the fund has the ability to consistently outperform when certain areas, ABS in particular, lose attractiveness.”