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Dampier: Why Causer and Woolnough have made me nervous about my bond funds

02 March 2015

The head of research at Hargreaves Lansdown has had 10 per cent of his ISA in Eric Holt’s Royal London Sterling Extra Yield Bond fund for some time, but he’s having second thoughts about his exposure.

By Joshua Ausden,

Head of FE Trustnet Content

Talk of an interest rate rise in the US this summer could cause turmoil in the bond market, according to Mark Dampier, who is considering cutting his exposure to fixed interest in his pension and ISA.

The head of research at Hargreaves Lansdown has fought against the bond bears for some time and reaped the rewards, but is now starting to question how much longer their strong run can go on.

Conversations with star managers Paul Causer and Richard Woolnough have convinced Dampier that a rate rise is imminent, which would cause havoc for one of his biggest personal holdings: Eric Holt’s Royal London Sterling Extra Yield Bond fund.

“I’ve been more than happy with Eric – I’m getting a 5 per cent yield which is tax free and the fund has performed brilliantly. I must admit though, I’m wavering slightly,” he said.

“I had Woolnough and Causer in last week, and both are wary of there being a change in the cycle. Paul is of the impression that there will be a rate rise this year, which would the first shift in policy for six years. It suggests there is a turn in the cycle and I haven’t a clue how bonds will react. However, I don’t think the risk is currently priced in.”

“I don’t think it will be massive. In 1994 they doubled rates and bonds sold off 20 per cent. However, the mere mention of a rate rise has caused a couple of taper tantrums, so exactly what will happen when policy actually changes is worrying. Bonds could see a hefty sell-off.”

“I’m beginning to have a change of heart. I’ve got a big holding in my pension. The [Royal London] fund has given me a great return but the capital side has been much flatter of late.” 

Bond and cash yields have stayed stubbornly low since the financial crisis, proving some of the most experienced managers wrong.

William Littlewood’s
Artemis Strategic Assets fund suffered as a result of the manager’s hefty short position in fixed interest. FE Alpha Manager Stewart Cowley has also been on the wrong side of a bet on interest rates, and Bill Gross’ negative bet on fixed interest in recent years arguably cost him his job.

FE data shows developed market bond indices have delivered stellar returns over the past six years, with some funds – including the likes of Royal London Sterling Extra Yield Bond – more than doubling investors’ money with significantly less volatility than equities.

Performance of fund and indices over 6yrs

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Source: FE Analytics

Royal London Sterling Extra Yield Bond sits in the Strategic Bond sector, but has a natural bias towards high yield. Holt has next to nothing in investment grade, preferring debt rated BBB and below. More than a third of assets are in unrated bonds.

A hefty allocation to financials since 2011 has been a big driver of performance. The sector still accounts for 30 per cent of assets.


The fund is currently yielding 5.33 per cent but it’s not uncommon for this figure to be upwards of 7 per cent.

Indeed, it has been one of the best income-paying funds of its kind in recent years; according to FE data, an investment of £1,000 six years ago has delivered dividends worth £643.35. This puts it well ahead of the likes of M&G Strategic Corporate Bond and Invesco Perpetual Corporate Bond, headed up by Woolnough and Causer, respectively.

Income earned over 6yrs

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Source: FE Analytics

The strong performance has unsurprisingly attracted a lot of interest from investors. Assets have almost doubled over the past three years to over £1bn.

ALT_TAG Dampier (pictured) hasn’t yet sold down his ISA’s 10 per cent position in the fund, but says there’s a strong chance he will cut his exposure in the coming weeks.

“I saw Eric recently and he’s not particularly bearish. He reckons he’ll be able to do the coupon and a bit more, which is around 7 per cent. If you get that every year you’re doing ok!” he said.

“For a long time I’ve been fine with bonds. For some reason a lot of people saw this as a normal cycle and thought rates would go up quicker than they have. It really feels like it’s going to happen now though and that makes me nervous.”

“I don’t know how markets will react, but if there is a rise in yields that could actually be a very good buying opportunity. I can’t see rates going above 2 per cent given what the data is saying at the moment.”

“It’s whether I’m going to sit it out, or sell out and possibly buy back in. Usually in this situation I am inactive because you can’t second guess what the Fed will do. However, as Causer said, there could be a better opportunity to buy down the line.”

While interest rate rises are seen as the enemy to bonds, the relationship between rate rises and high yield bond performance is far from solid. According to a recent study by JP Morgan, the average three-month performance of high yield bonds when five-year treasuries rose by 70 basis points is a positive return of 2.5 per cent.

However, Dampier notes this is no normal market cycle, and thinks there could be a rush to the exit doors when rates rise. A fund that has done as well as Royal London Sterling Extra Yield Bond could be at particularly risk.

An FE Trustnet poll at the end of 2014 found that the overwhelming majority of readers aren’t expecting an all-out crash for bonds this year. Of the 1,428 investors and advisers polled, 70 per cent said they weren’t factoring in a steep sell-off.


While Dampier is wary of his bond holdings, one area that is interesting him at the moment is China, and particularly Dale Nicholls’ Fidelity China Special Situations IT, formerly headed up by Anthony Bolton.

“It’s smashed the MSCI China index since launch and is now on a 15 per cent discount. It’s 27 per cent geared and on a good valuation in my view,” he said.

Performance of trust and index since launch

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Source: FE Analytics

“China has been dominated by the macro troubles but they haven’t really materialised. There’s definitely a value story there.”

Dampier doesn’t have any exposure to the trust in his pension or ISA, but said he was taking a closer look at it.

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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.