Jones: LTRO shake-out rewards low-risk strategy
The manager says his Rathbone Strategic Bond fund has proven its worth following the ECB’s injection of cheap money into the banking system.
By Mark Smith, Reporter, FE Trustnet
Thursday May 17, 2012
The chaos in the fixed income market ignited by the latest escalation of the eurozone crisis has proven the value of holding a diversified fixed interest fund, says Rathbones' Bryn Jones
Strategic bond funds have a mandate to invest across the full range of fixed income assets and were originally designed to provide investors with a complete exposure to low-risk bond securities under one roof.
However, commentators have expressed concern that, in looking for the most attractive long-term returns, many funds in the sector are just high yield bond funds in disguise.
Jones says that the Rathbone Strategic Bond
fund he manages was launched in response to the rising level of risk within the sector.
"We were really concerned about the risk that was being taken in the Strategic Bond sector and we identified that managers can have as much high yield as they like," he explained.
"People are getting paid in the long-term to take on risk. However, what that brings in is a huge amount of volatility in the medium- and short-term."
"We designed a fund that was able to bring in the kind of returns that other strategic bond funds were getting, [but] with lower levels of volatility."
"We identified there were six or seven different indices ranging from gilts, corporate bonds, high yield and emerging markets that we could allocate to that, over a longer period of time, would give a better risk-adjusted return."
Many investors simply want to get exposure to different asset classes within fixed income as they don’t have the expertise or the skill-set to manage their own asset allocation. Jones says that his fund offers exposure to the full range of fixed income assets.
"We designed a strategy that could move around those core index weights plus or minus 10 per cent either side, which would mean we could use strategic asset allocation overlay with Alpha generation coming up from below as well."
Half of the fund is invested directly in the corporate bond market and the other half gains exposure to fixed income via other collective schemes.
Data from FE Analytics
shows that the fund has returned 5.18 per cent since it launched on 3 October 2011, compared with a return of 7.45 per cent from the average fund in the sector.
Performance of fund vs sector since launch
Source: FE Analytics
Jones commented: "We’ve underperformed the sector since launch but what is interesting is that when we got the credit shake-out from the end of the huge uplift from LTRO we’ve seen the fund outperform. What’s more important to us than performance at this early stage is the volatility."
"Max drawdown and max loss are lower than the sector and this is what we’re trying to achieve."
Our data shows that the annualised volatility score of the fund over the last six months is 4.45 per cent, compared with 4.93 per cent from the sector.
In terms of controlling risk, Jones and co-manager David Coombs
have kept an underweight in emerging market currency exposure relative to the sector. The fund-of-funds portion of the portfolio is invested in short-duration strategies that take advantage of rising yields as well as traditional high yield and short-duration high yield.
"One of the criticisms of running a fund which is half direct and half fund-of-funds is that investors will say the TER will be quite high," Jones continued.
"Firstly, the amount we are buying means that we are able to negotiate institutional fees which are attractive for retail investors, but this also gives us huge amounts of liquidity if we get worried about the risks and need to sell."
"In a scenario where the whole market is trying to do that the bid offer spreads can be in excess of 5 or 10 per cent. The extra cost more than makes up for the extra liquidity."