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The top-performing bond funds advisers are ignoring

27 October 2015

In the next of the series, FE Trustnet highlights three IA Sterling Strategic Bond and Sterling Corporate Bond funds that have consistently outperformed but are among the least viewed by our readers this year.

By Alex Paget,

News Editor, FE Trustnet

Bond investors face a very uncertain backdrop as the consensual view is that, due to the low yields on offer and a possibility of higher interest rates, the next five years or so could be the worst seen for the asset class in a generation.

As a result, investors are constantly reminded about the need to back an experienced manager with a highly flexible process to deal with the increasingly high likelihood of rising yields over the medium term.

At the same time, those experienced managers tend to be the ones running the most amount of money within the various Investment Association fixed income sectors, which presents another possible problem given the falling levels of liquidity in the bond market – an issue that many think would hurt larger funds the most.

Certainly, it seems the largest funds in the IA Sterling Corporate Bond and IA Sterling Strategic Bond sectors are the portfolios that have generated the most adviser clicks on the FE Trustnet website so far in 2015.

 

Source: FE Trustnet

As the table above shows, the 10 most viewed factsheets (which include Invesco Perpetual Monthly Income Plus, M&G Optimal Income and Fidelity Moneybuilder Income) in the sectors currently account for 43.93 per cent of the total page impressions for the two peer groups year to date.

However, given that the two popular sectors are made up of 176 funds, there are many top-performing and highly-rated portfolios our advisers are ignoring.

Therefore, in the next in the series, we take a look at three funds in the IA Sterling Strategic Bond and IA Sterling Corporate Bond sectors that are run by experienced managers, are of a nimble size and have consistently outperformed their peers over the longer term.

 

Morgan Stanley Sterling Corporate Bond

A good example is the £126m Morgan Stanley Sterling Corporate Bond fund, which has generated just 0.21 per cent of the total traffic for the two sectors in 2015.

The four crown-rated fund is headed up by FE Alpha Manager Leon Grenyer, who took charge of the portfolio in June 2008. He was joined by Richard Ford as deputy manager in the December of that year.

According to FE Analytics, it has been a top quartile performer in the IA Sterling Corporate Bond sector over that time with gains of 74.23 per cent, meaning it has beaten its average peer by close to 25 percentage points in the process.

Performance of fund versus sector under Grenyer

 

Source: FE Analytics

The fund is also top quartile over one, three and five years, having beaten the sector average in four out of the past six calendar years (the exceptions being 2009 and 2011). It is also top quartile so far this year.


 

FE data shows it sits in the top quartile for its risk-adjusted returns (as measured by its Sharpe ratio) and maximum drawdown since the manager has been at the helm, largely due to its losses of just 1.84 per cent in the crash year of 2008 compared a to 9.67 per cent fall from the peer group average.

Grenyer is currently running an average portfolio duration of 6.68 and has his largest credit rating exposure is to A-rated bonds, which account for 36.91 per cent of his assets. He also has a further 28.83 per cent in BBB-rated debt.

Morgan Stanley Sterling Corporate Bond, which currently yields 3 per cent, has a clean ongoing charges figure (OCF) of 0.37 per cent.

 

EdenTree Amity Sterling Bond

Turning to the less constrained IA Sterling Strategic Bond sector now and the second portfolio on the list is the £87m EdenTree (formerly Ecclesiastical) Amity Sterling Bond fund.

It is run by Chris Hiorns and FE Alpha Manager Robin Hepworth and, despite its outperformance, has only accounted for 0.47 per cent of the two sectors’ adviser clicks in 2015 so far.

The duo launched the fund, which invests across government bonds and debt issued by companies which “make a positive contribution to society and the environment through sustainable and socially responsible practices”, in February 2008.

Over that time it has returned 54.57 per cent, outperforming its peer group average by 7 percentage points.

Performance of fund versus sector since launch

 

Source: FE Analytics

While the fund hasn’t been the most consistent of outperformers, Hiorns and Hepworth have proven themselves at being able to adequately protect their investors’ capital. FE data shows the fund sits in the sector’s top quartile for its annualised volatility, downside risk, maximum drawdown and risk-adjusted returns since launch, for example.

The fund, which yields more than 5 per cent, has a much higher allocation to credit rather than sovereign debt and the managers explained this positioning in their most recent note.

“The UK economy continues to perform well with unemployment levels remaining low, private sector wages rising and GDP growth remaining steady whilst consumer price inflation is close to zero,” the managers said.

“We believe that bond yields are likely to rise very slowly over time as inflationary pressures are very weak. Corporate bond credit spreads have risen considerably from the low reached in March and the corporate bond market is consequently more attractively valued.”

Their highest credit exposure is to BBB bonds (38.15 per cent) and some 40 per cent of the portfolio is set to mature over the coming five years, with the managers expecting to use that cash to buy into higher yielding bonds.

The fund’s OCF is 0.77 per cent.

 


 

Invesco Perpetual Tactical Bond

The final fund on the list comes as somewhat as a surprise given that it is headed-up by the highly experienced fixed income duo of Paul Causer and Paul Read.

While the managers’ Invesco Perpetual Monthly Income Plus and Corporate Bond funds have generated close to 15 per cent of total adviser traffic this year, their £404m Invesco Perpetual Tactical Bond fund has only garnered 0.48 per cent of the two sectors’ clicks.

Nevertheless, it is held in high regard by the team at Square Mile – which has given the fund its highest AAA rating.

“This is a flexible mandate and the managers have the freedom to invest across government and corporate bond markets worldwide,” Square Mile said.

“It can, at times, take large positions and could in theory be 100 per cent invested in, for example, government bonds or sub-investment grade debt. In reality it is likely to have positions in various markets and will usually have a focus on corporate bonds.”

“The managers run this as a high conviction strategy and are not afraid to express their opinions through the fund's positioning when they see value.”

Performance of fund versus sector since launch

 

Source: FE Analytics

Given it focus on value, though, Square Mile points out that the fund can be more volatile than Causer and Read’s other funds – and that has certainly been the case over recent years.

While it has narrowly outperformed the IA Sterling Strategic Bond sector since its launch in February 2010, it has done so with a bottom decile maximum drawdown of 15.18 per cent.

The managers are running a more cautious portfolio at the moment, however.

“With many areas of the bond market appearing relatively fully valued, we are using the flexibility we have in the fund’s mandate to take a defensive position. We hold a number of government bond positions along with exposure to short-dated securities and cash,” they said in their most recent update to investors.

It must also be noted that while the five crown-rated fund is only £404m, Causer and Read run a hefty £24.5bn across their onshore and offshore fixed income funds.

Invesco Perpetual Tactical Bond has a yield of 1.2 per cent and an OCF of 0.94 per cent. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.