A bottom-up selection of holdings, remaining uninfluenced by benchmark weightings and achieving diversification through a large number of investments remains the right investment style despite changes in the bond market, according to Fidelity’s Ian Spreadbury (pictured). 
The FE Alpha Manager, who has been at the helm of Fidelity MoneyBuilder Income since its launch in October 1995, says that some of the only changes in the fund over the last 20 years have been the size of the team and the appointment of co-manager Sajiv Vaid in August this year.
The manager also argues that his two-decade-long approach to markets remains appropriate, despite a lower-yield environment and signs that the bull run in fixed income assets could be entering difficult territory.
While bond markets have endured a lacklustre period of performance throughout 2015, Spreadbury remains confident that his investment process will continue to hold up against headwinds facing the asset class.
Performance of indices in 2015
Source: FE Analytics
“Not a lot has changed [in the fund] over 20 years. The team was certainly a lot smaller – we started with a trader, myself and maybe a credit analyst, so it was a very small team. But the process was very much the same as it is today, so it was based on research and analysing companies from the bottom up rather than focusing on those big top down bets that lead to more volatility in the fund,” Spreadbury explained.
“This has always been very important to us, even then, and that’s still the way we manage funds today. We have a big research team now – there are more than 100 people in the fixed income team, as well as credit analysts doing the fundamental credit search on everything we own, the quant team managing our risk and modelling valuations for us, and a trading team trying to make sure we get the best execution for our funds.”
“That hasn’t really changed, so the process is very much the same. In terms of fund objectives – income, safety, the fact we want the fund to be a good equity diversifier, that hasn’t changed either.”
While the fund has the freedom to invest in any market sector, industry, geography or asset class, it primarily invests in sterling-denominated bonds to hedge against currency risk.
It also has an FE Risk Score of 31, which suggests that the fund has been less than a third as risky as the FTSE 100 index over recent years.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “The fund is probably best suited to lower-risk investors looking for income.”
“One of the difficulties for bond funds generally is the low yield that’s available on bonds and the potential for capital erosion if interest rates rise, which is probably why if you do have a bond fund, managers are having to work extra hard to get the yield that investors want and probably why you want a seasoned veteran like Ian Spreadbury at the helm.”
While lower yields have made fixed income funds seem less attractive to many investors, Spreadbury exploits these inefficiencies within the market by researching individual companies and bonds as opposed to following a top-down macro view.
The manager also aims to ensure that the bonds he buys into are well-diversified and that there is no single strategy or position that heavily sways either the risks or returns of the fund.
“I think the bottom-up [technique] is important because it helps to find those yield opportunities that don’t open you up to too much risk,” Khalaf continued.
“I think that is a feather in [Spreadbury’s] cap. Within all bond funds there is always an element of macro that has to be part of the equation but the focus on bottom-up as well I think is a source of return for investors.”
Because of this, the fund often strays from its benchmark. One area of the market that Spreadbury has been particularly cautious on over the years is the financials sector, which the BofA Merrill Lynch Euro-Sterling index has had always had a significant weighting in.
“I think the thing about bond investing is that following a benchmark too closely often doesn’t make sense, because you often find the reason that bonds are in a benchmark is that companies or sectors have a lot of debt,” the manager said.
“We saw it with financials at various times and the reason that they were a big chunk of the benchmark was that they were over-leveraged – it’s not necessarily a reason to invest in those sectors, so I think having a research team and focusing on the areas where you have conviction makes much more sense than following a benchmark.”
While the fund’s primary focus is to generate income, it also aims to outperform its benchmark over the long term or over more than five years.
However, our data shows that it has underperformed its benchmark in each of the last 10 full calendar years, despite outperforming its sector average every year with the exception of 2012 and 2013.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The Square Mile research team, which has given the fund its highest possible rating of ‘AAA’, says that this is unsurprising given the defensive nature of the fund and its focus on risk in comparison to its benchmark.
“Mr Spreadbury is an extremely experienced manager who has built up a strong reputation for successfully managing fixed income funds over a number of market cycles,” it said.
“Given the investment process and focus on risk, the fund tends to perform in a relatively defensive manner in comparison to its benchmark, underperforming in strongly rising markets but outperforming when corporate bonds perform poorly.”
While the team adds that the fund’s income stream can vary as there is no targeted level, it is nevertheless secure and carries a lower risk than many other fixed income investment vehicles.
Currently, Fidelity MoneyBuilder Income yields 3.62 per cent, which Square Mile says reflects today’s challenging low interest rate environment.
“Given where yields are at the moment, around 3 to 3.5 per cent for corporate bonds, inevitably returns are going to be a bit lower on the fund going forward in the medium term,” Spreadbury admitted.
“We’re going to continue to manage the fund in the same way and our process will be unchanged. It’s still very much a bottom-up, research-driven process. Our objectives are pretty much the same, so as well as performance we’re looking for low volatility, low correlation to equities as much as we can as well as returns inevitably going forward.”
Over five years, which is the minimum time horizon the fund aims to outperform its benchmark in, Fidelity MoneyBuilder Income has achieved a lower annualised volatility than the BofA Merrill Lynch Euro-Sterling index despite underperforming it by 7.54 percentage points and returning 27.67 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund has a clean ongoing charges figure of 0.56 per cent.
