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Hepworth: Why I’m using absolute return instead of bond funds

22 November 2015

GAM’s fund of funds manager Charles Hepworth says funds with an absolute return mandate are preferable to traditional bond funds.

By Daniel Lanyon,

Senior Reporter, FE Trustnet

Investors should buy absolute return funds instead of in traditional bond funds, according to Charles Hepworth, investment director at GAM.

Fixed income has been volatile in 2015 with many experts expecting a huge sell off. In fact, it has only fallen from its brief rally at the start of the year and has held up well during parallel equity market volatility.

However, even the likes of Jim Leaviss, head of retail fixed income for M&G’ has recently warned that a huge sell off in the bond market is only a matter of time.

“Bond yields have risen throughout this year, but it’s not been the big sell-off that we’ve been anticipating, I think that will come once people realise that wages are increasing on an ongoing basis,” Leaviss said.

So far in 2015 those predicting the end of the asset class’ 30 year bull run have not been proved correct but with most now expecting a December rate rise by the Federal Reserve, the outlook is very unclear.

Performance of indices over 15yrs

Source: FE Analytics

For Hepworth, who manages GAM’s funds of funds range, this has presented a problem as he hasn’t wanted to be invested in the more traditional end of fixed income but is looking for a portion of exposure that dampens  equity market volatility.  


The manager (pictured) is underweight core fixed income across the GAM Star Balanced, GAM Star Cautious, GAM Star Defensive and GAM Star Growth funds but has an equivalent proportional overweight to absolute return strategies.

“We believe [this] will offer the same traditional fixed income returns we have become used to,” he said.

Hepworth owns absolute return funds such as the Alken Absolute Return Europe and Odey Odyssey portfolios.

Both are based offshore and were launched in 2011. Since the start of the year they have performed quite differently, but have both been fairly uncorrelated to the fixed income market.

Performance of funds and index in 2015

Source: FE Analytics

Tim Bond has run the £150m Odey Odyssey fund since its launch in October 2011, having previously headed global asset allocation Barclays Capital.

The manager uses a complex investment model and econometrics to establish long and short positions across the global equity markets as well as government bond and corporate credit markets.


According to FE Analytics, the offshore recognised fund has returned 52.01 per cent since its launch. As a point of comparison, the FTSE All Share has gained 42.16 per cent over that time and IBOXX Sterling Overall Maturities index has 

Performance of fund and indices since launch

Source: FE Analytics

Nicolas Walewski has run Alken Absolute Return Europe since January 2011 over which time the fund has performed well ahead of its peers in the FCA Offshore Recognised Absolute Return sector, returning 18.57 per cent.

Performance of fund and indices since launch

Source: FE Analytics

The portfolio has been mostly falling for about 18 months, since April 2014 when net exposure reached its lowest levels since the European sovereign debt crisis.

Walewski has recently been reducing his short exposure and thinks that European monetary policy and low oil prices are supportive of equity markets.

Hepworth does own some fixed income funds but in holding the likes of GAM Star Credit Opportunities and GAM Star Total Return MBS he says he is opting for more non correlated fixed income strategies as he thinks these are likely to do well when/if interest rates rise in the near term.


While there has not been the much predicted cataclysm for bonds yet in 2015, there has been plenty of weakness in equities which has spilled over into other asset classes.

However, as a recent article pointed out, bonds have so far done their job of holding up in the falls around Black Monday.

“Clearly holding fixed income helped limit some of the more vicious downdrafts in the equity market we experienced in August and into September. We added marginally in September to some of the holdings we use but on balance remain underweight to fixed income as an asset class,” Hepworth said.

“So yes they did act correctly in their function of risk diversifying but the need to be correctly positioned going forward in what seems to be a more imminent rate rising environment is ever more critical.”

 He adds the use of floating rate structures within fixed income allocations as well as lowering the overall duration of fixed income is now more obvious than ever.

 Alken Absolute Return Europe has a clean ongoing charges figure [OCF] of 1.5 per cent and a performance fee of 20 per cent over its hurdle rate of 5 per cent annualised returns. Odey Odyssey has a clean OCF of 0.75 per cent but also charges a performance fee of 20 per cent.

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