The PFS TwentyFour Dynamic Bond fund has been the largest beneficiary of outflows from the biggest portfolio in the IA Sterling Strategic Bond sector over the past six months, research by FE Trustnet suggests.
It has been a tough time for bond funds all round in 2015, particularly in the past six months. Worries over interest rate risk and historically low yields have meant investors have seen a muted or negative performance from their bond funds while some managers have had to stem the impact of substantial outflows from their portfolios.
In the IA Sterling Strategic Bond sector this has been very apparent: according to the Investment Association, the peer group has seen net retail outflows in four of the past six months. Over the past three months, £467m has come out of the sector.
Of course, that’s just the net withdrawals from the whole peer group. As previously reported, the M&G Optimal Income fund is the worst affected having shed £4.7bn over six months; this brings FE Alpha Manager Richard Woolnough’s colossal portfolio down to £18.3bn.
According to FE Analytics, the only part of the sterling fixed income market to be in positive territory over the past six months is gilts, which have rebounded from worries they would be the hardest hit by a rising interest rate environment as investors sought safe havens.
Performance of sector and indices over 6 months
Source: FE Analytics
Rather than going for a similar portfolio to M&G Optimal Income within the strategic bond sector, our data suggests investor cash has turned to the more esoteric PFS TwentyFour Dynamic Bond fund, which is managed by Gary Kirk and Eoin Walsh. It took £755m in the past six months.
The fund’s use of derivatives, currency hedges and holdings such as asset-backed securities has been fruitful since its launch in April 2010. It has posted top decile returns of 48.93 per cent while the average fund in the sector returned 30.48 per cent.
Performance of fund and sector since launch
Source: FE Analytics
It must be noted that the fund soft-closed to new investors in April.
The next largest inflow (of £291m) went to the £2.5bn Jupiter Strategic Bond fund, managed by FE Alpha Manager Ariel Bezalel, which was a beneficiary of the rally in sovereign debt and longer duration assets in general.
The manager took the view in the summer that interest rates would be lower for longer and bought long-dated US treasuries, which have greater interest rate sensitivity, as many in the market pursued a flight to safety.
Historically Bezalel (pictured) has been bearish on core developed market sovereign debt and had therefore had a bias towards higher risk and higher yielding bonds.
According to FE Analytics, the fund has outperformed both the IA Sterling Strategic Bond sector and its iBoxx Sterling Non-Gilts All Maturities benchmark so far this year with gains of 3.55 per cent, the sixth best performance in the 78-strong sector.
Performance of fund versus sector and index in 2015
Source: FE Analytics
The manager recently said that in the short term, he thinks the Federal Reserve’s indicated intention to start raising rates will soon “be shelved” due to a deterioration in the global economy.
“I suspect we will see a lot more easing in Asia in the coming months, which will put downward pressure on currencies, lead to cheaper exports, and put a cap on inflation globally,” he said.
“These are indeed challenging times. In the portfolio we are steadily moving up the ratings scale. As concerns about China have grown, we have steadily increased the average duration in the fund to over five years, primarily by boosting our allocation to highly rated sovereigns such as the US. Our duration is longer than many of our peers.”
“With my belief that yields are unlikely to move much higher in this world, high quality sovereigns should provide an effective hedge against deflationary shocks. Rather than raising rates in the near term, we think that the Fed will flip from being hawkish to dovish as sentiment weakens and the economic picture becomes gloomier.”
The Henderson Strategic Bond and Artemis High Income funds were the next largest recipients of inflows with £150m and £145m coming in, respectively.
Like Belazel, FE Alpha Manager John Pattullo – who heads the £1.3bn Henderson Strategic Bond fund – has a more relaxed strategy with regards to interest rate sensitivity, believing sovereign debt presents decent value due to the market’s concern it is in a bubble set to burst.
With the expectation of lower yields to come Pattullo has also been adding duration. But he also has one of the highest weightings to cash in the sector with 12.98 per cent in cash, almost three times the average amount among his peers.
The fund has returned 25.6 per cent over the past five years versus 25.73 per cent from its average peer.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
FE Alpha Manager Adrian Gosden’s Artemis High Income fund has a clear focus on stock-picking and, unlike many strategic bond funds, does not build its portfolio around macroeconomic views. It also tends to hold a number of equities, with current holdings including Legal & General, BAE Systems and F&C Asset Management.
Baillie Gifford Corporate Bond is the fifth largest recipient of inflows having taken in £131m in the past six months.
Stephen Rodger and Torcail Stewart's £536m fund has beaten the sector’s average return in seven years out of the past decade, making a total return of 67.67 per cent over this period.
However, due to its area of focus it has been third quartile this year as the corporate bond space has been the hardest hit in the past six months or so. However, some are expecting a near term recovery.